Friday, 12 November 2010

Budget Cuts

We're having a lot of sound and fury about bank regulations at the moment, but I've been noticing another debate that's been going just a fiercely, although with slightly fewer headlines.  It's the debate about cutting spending.

Apparently, in the "little red book" of briefings provided by Treasury and Finance to the incoming Labor government, they recommended substantial cuts to government spending.  This was needed, they said, to prevent the economy from growing too fast and putting upward pressure on inflation and interest rates.

What occurred to me (and I'm sure I'm not the first person to think of this) is that Keynesian economics has left us with an inbuilt tension in the way we think about Government spending.  After the Great Depression governments in the developed world adopted Keynes' idea that government spending should be used to smooth out fluctuations in the market economy.  When there was a downturn, governments should increase their spending to boost employment and keep the economy moving.  In boom times, governments should decrease their spending to avoid the economy reaching the limits of its capacity and inflation running out of control.

Cue the 2008 Global Financial Crisis, and governments around the world rapidly poured billions into propping up their economies.  In Australia we had capital works sprouting like mushrooms - free insulation for householders, school halls and tuckshops, and a large public housing construction program.   Now in Australia things seem to be recovering and interest rates are going up, so economists are saying its time to wind back the spending.

The trouble with this is that it conflicts with the other - most of us would probably say main - reason for government spending, which is to deliver services.  The task of delivering quality education, health care, income security, housing and so forth requires carefully considered, well planned and consistent programs funded to a level that meets the needs.  It's very difficult for governments to do this while at the same time increasing and decreasing their spending in response to fluctuations in the global economy.

Housing researchers have been documenting high levels of housing need for decades.  Issues include a large number of households paying over 50% of their income on their housing (400,000 households and more since the early 1990's), an increasing gap between average incomes and average house prices, and the disappearance of rental housing at the bottom end of the market.  A key way to respond to this is to provide public and community housing to people on low incomes, giving them security and affordability while taking stress off the private rental market.  It's not just bleeding heart social workers like me saying this, it's people from all across the spectrum - housing industry organisations, trade unions, urban economists, planning professionals.

However, governments of both persuasions, in the grip of a desire to reduce government debt, have ignored this advice and run down the public housing system.  Then along comes the global financial crisis, and suddenly there is money to build 20,000 new public housing dwellings as well as repairing thousands more right now.

Unfortunately, after decades of neglect the capacity of State and Territory housing departments to deliver this housing is almost zero.  Organisations that have rolled along building a few hundred dwelling units a year, disposing of their land banks to keep up with repairs and maintenance, suddenly had to produce thousands in the space of 18 months.  The result - poor planning, dwellings in less than ideal locations, a scramble to sort out management arrangements. 

Then, after two or three years of effort, it will be over.  The crisis is passed, the Treasury boffins say it's time to cut spending.  Housing departments will have learnt lessons from the process and will be able to do better next time - except that next time won't be any time soon and most of the people involved will be elsewhere.  20,000 households will be moderately happy to be in reasonable and affordable housing although they will complain about construction flaws and lack of public transport.  Meanwhile, the other 380,000 will go on paying their 50% of income on rent and wait forlornly for the next economic downturn.

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