{"id":4920,"date":"2013-03-28T13:00:59","date_gmt":"2013-03-28T03:00:59","guid":{"rendered":"http:\/\/www.aspistrategist.ru\/?p=4920"},"modified":"2013-03-29T10:40:50","modified_gmt":"2013-03-29T00:40:50","slug":"a-fiscal-reality-of-our-own-creation","status":"publish","type":"post","link":"https:\/\/www.aspistrategist.ru\/a-fiscal-reality-of-our-own-creation\/","title":{"rendered":"A (fiscal) reality of our own creation"},"content":{"rendered":"

As part of the Alliance 21 project, I was asked to give an Australian perspective on defence spending and the Australia\u2013US alliance. Or, in other words, it was my job to explain why Australian defence spending has been slashed<\/a>. A simple enough task you\u2019d think, given the apparent agreement\u2014at the political level at least\u2014that we each face a so-called ‘new fiscal reality’<\/a>. If only it were so.<\/p>\n

While US officials say they understand and accept the imperative for Australia to curtail its defence spending, it\u2019s increasingly clear that\u2019s not the case. Certainly those in the US defence establishment not constrained by diplomatic niceties haven\u2019t been fooled. Have a look at what my US colleagues on the Alliance 21 project Michael O\u2019Hanlon<\/a> and Patrick Cronin [coming soon] have to say.<\/p>\n

After all, why would anyone conclude that our countries face similar situations? Australia and the United States are in very different economic and fiscal situations. The table below (click to enlarge) shows the most recent data for comparable periods for each country.<\/p>\n

\"\"<\/a>Australia has lower unemployment, higher workforce participation and stronger economic growth than the United States. More importantly, from a fiscal perspective, Australia\u2019s debt and deficit are insignificant compared with that of the United States, and our government expenditure as a share of GDP is 10% smaller. At the same time, the United States is spending more than twice as much as Australia on defence as a share of GDP.<\/p>\n

The US fiscal consolidation is being driven by the realisation that they can’t continue to pile up debt at the rate they are today forever\u2014especially given the long-term trends in social security and health costs. There\u2019s no denying that the machinations over the US budget are ugly; sequestration<\/a> is the bluntest of blunt instruments. But who are we to point the finger about dysfunctional politics?<\/p>\n

The point is that the US needs to get its fiscal house in order one way or another. The argument that the US can continue to borrow indefinitely because they have the exorbitant privilege of being the world\u2019s reserve currency is flawed. They’ll only be accorded that privilege so long as expectations of inflation and default are held in check\u2014and that demands getting debt under control. No such imperative exists for Australia.<\/p>\n

That the United States has decided to cut defence spending as part of its effort to balance the books is hardly surprising\u2014at 4.1% they spend a greater share of GDP on defence than any advanced economies apart from Singapore and Israel. Once again, the difference with Australia is stark; they are cutting defence from a high base, we are doing so from a relatively low one.<\/p>\n

So what was I to say to a US audience about Australia\u2019s dramatic about-turn on the spending promises touted in the 2009 White Paper? I offered two viewpoints.<\/p>\n

First, I explained that history had given Australian politicians an irrational fetish for surpluses at any cost. I said that because an Australian Labor government hasn’t delivered a surplus since 1989; it represents a political Holy Grail that blinds politicians to anything else. They didn\u2019t swallow that argument. For some reason, unbeknown to me, Australia\u2019s policy acumen is held in very high regard in America. Perhaps we’re still living on the reputation of the Hawke-Keating era. Whatever the reason, they assume that we are thoughtful and deliberate in our decisions. It was put to me twice that Australia only fully abandoned its 2009 defence plans after it became clear that the US pivot to Asia was going to happen\u2014hardly a healthy suspicion for our ally to be holding.<\/p>\n

The second explanation I gave was that Australia is simply behaving like any junior partner in an alliance and free-riding because it would be illogical to do otherwise<\/a>. They understand this argument, having borne the brunt of free-riding allies in Europe and Asia since WWII, but they don\u2019t like to hear it. If nothing else, it offends them to think that a friend such as Australia would deliberately take advantage of them.<\/p>\n

Having failed to adequately explain why Australia has reduced its defence effort concurrent with an increased US focus on the region, I turned to explain how we might nonetheless work together to build security in this part of the world. My ideas are set out in my Alliance 21<\/em> paper<\/a>. It\u2019s the usual package of enhancing regional cooperation, greater use of Australian bases and materiel cooperation. They took this for what it was worth\u2014better than nothing.<\/p>\n

I\u2019m on the record<\/a> as arguing that Australia can and should set its defence aspirations below that contained in the 2009 Defence White Paper. I stand by my arguments. But I can’t pretend, and nor should anyone else concerned with the health of the ANZUS alliance, that the recent precipitous cut to Australian defence spending hasn’t had a negative impact on the Canberra\u2014Washington relationship.<\/p>\n

Mark Thomson is senior analyst for defence economics<\/em> at ASPI.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

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