Budgets used to be big news once, both in the lead-up and in the aftermath. Now, they’re front page news for a day, and even that’s not secure. If the Beaconsfield mine rescue had been a day later, I suspect at least some editors would have pushed the Budget to the inside pages. Why the decline in interest?

For a start, in the past Budgets usually contained increases in excise taxes, so the tabloids could keep “Beer, Cigs, Up” stored away in 60 point type, to be run every year. The excises were indexed to inflation back in the 1970s, so now they go up automatically, with no need for an announcement. The Fraser government briefly went the whole hog and indexed the income tax scales, which killed off the good news of regular tax cuts as well, but that idea only lasted a couple of years. Still, people are pretty much used to tax cuts that return bracket creep and not much more.

Thanks to Bill Leak

The fact that people could make money by anticipating changes in taxes also produced a cult of secrecy, which generated high drama around Budget leaks. Now the government either pre-announces or comprehensively leaks most of the Budget measures in advance. The trick in media management (fresh when Keating did it back in the 80s, but tired now) is to have a rabbit or two left to pull from the hat on Budget night.

Next, the big debate over the size of government has settled down into a stalemate. As a share of GDP, both tax revenue and public spending have been pretty much constant (in the high 30s) for the last twenty years. The numbers for the Commonwealth government taken separately are much the same, though they’re complicated by the debate about how to treat the GST. If you divide it up proportionally to the taxes it replaced, you get the answer that the tax take for the Commonwealth and the States is also virtually unchanging.

The most important reason for the decline in interest though, is that Budgets used to be the central focus of debate over macroeconomic policy and the likely outlook for unemployment and inflation.

This is now done by monetary policy, that is, by changing interest rates. All the attention that used to be paid to the economic analysis in the Budget is now focused on the Reserve Bank. The only real concern expressed about fiscal policy is whether an expansionary setting for fiscal policy will produce an offsetting increase in interest rates.

While the shift to reliance on monetary policy and central bank independence has worked well so far, it has had the unfortunate effect of killing off public debate about macroeconomic issues. If things should go badly wrong, the policy debate would need to be restarted from scratch. So, it’s worth using the Budget papers to look at the risks that face the Australian economy and the implications for issues such as unemployment.

The projections in the Budget papers are fairly rosy, though it’s fair to say they are more downbeat about our short-term prospects than those of the Reserve Bank. Treasury predicts steady growth in real GDP at around 3.5 per cent per year until 2009-10, the end of the forecast range. Employment is expected to grow at around 1.5 per cent per year.

An immediate implication is that no significant change in unemployment is expected. The projected growth in employment will be almost exactly what is required to absorb growth in the labour force, arising from population growth and the gradually increasing participation rate for women.

This seems to be fairly widely accepted, with the government regularly referring to the fact that unemployment rates are the lowest for thirty years, but it’s not much of an achievement. The present unemployment rate of 5.1 per cent, achieved after an expansion lasting fifteen years, is only marginally below the previous cyclical lows in 1981 and 1989. And the ten years of the Howard government have yielded a reduction of only three percentage points.

It would not be feasible to restore the full employment of the postwar ‘golden age’ but international evidence suggests that, under favorable macroeconomic conditions, a well-funded and well-designed set of active labour market policies could achieve substantial reductions in unemployment, reducing both measured unemployment and various forms of hidden unemployment. The last attempt at such a policy, Labor’s Working Nation, produced significant benefits with only modest expenditure, but was scaled back under Labor and scrapped as soon as the Howard government took office. Clearly nothing of the kind is planned for the foreseeable future.

The government’s complacency on unemployment is bad enough if we accept the projections of continued steady growth. But the Budget fails to acknowledge the fact that, stable as it may seem, the Australian economy is sailing in uncharted waters.

Australia has a current account deficit equal to 6 per cent of GDP and, in the Budget papers, this is projected to continue. Any expansion in export volumes is expected to be offset by a return to more normal terms of trade as the commodity boom winds down, and by increases in payments on foreign debt. Having already reached 60 per cent of GDP, net foreign debt is going to continue growing as long as these deficits continue.

At any time before 1990, such large deficits would have produced an immediate policy response, as they did in the 1980s. The assumption was that, sooner or later, growing foreign debt would produce an adjustment crisis, and it was better to take some pain sooner than a lot later.

Now, however, the dominant view is that debt is a matter for individual borrowers and lenders, and that aggregate national debt does not matter. Implicitly, the assumption is that over time, any imbalances will be smoothed out by market processes.

One problem with this analysis is that the current account deficit is as much the product of government policy as of market forces. Beginning with the halving of capital gains tax in 1999, the Howard government has assiduously promoted the housing boom which has driven private consumption and diverted investment from the traded goods sector.

A more serious problem is that the postulated process of smooth market adjustment has rarely been observed in reality. The only evidence in favour of the idea that foreign debt is benign under current market conditions is that we’ve been running deficits consistently for a long while, and nothing bad has happened yet.

If things do turn bad, unemployment will start from a base that is essentially the same as when the downturns of the 1980s began. All the progress of the past ten years would be lost with a single year of recession. We can only hope that the gamble we are running pays off.