Adam Creighton (@Adam_Creighton Economics correspondent for the Australian) wrote an article The Democracy Deficit published in Charter magazine, which has subsequently been shortened and republished in the Australian last Friday. While I agree with his general theme about the incentives in democracies being for governments to respond to voters’ demands and spend more over time – free money, after all, is attractive – his medicine is off mark.
There is no inexorable decline for democracies to financial ruin. They can be self-correcting if governments overspend – as shown with the 1992 election of the Kennett government in Victoria (I understand that the Victorian Government was in a much worse financial state than is generally believed) provided the political system allows change to be implemented. It could be argued that the US Federal political system does not allow reforms to be implemented effectively or efficiently.
While some European governments appear to be in financial trouble, the Australian government – one of the longest-existing democracies – is easily able to sell its bonds at low prices. Good financial management of a government is probably more connected to political culture, effective financial controls, transparency of economic and financial data, and clear lines of accountability.
In addition, the idea that there should be a constitutional limit of spending – as suggested by Creighton – is ill thought out.
- it does nothing to prevent unsustainable budget deficits unless there are similar provisions for revenue raising;
- determining Creighton’s proposed maximum level of government expenditure would not a technical process;
- like all such constitutional provisions, it would entrench a policy view that existed at one point in time;
- it would reduce the flexibility for governments to respond to societal needs; and
- it would create incentives for governments to disguise expenditure and redefine economic activity.
While the article has shortcomings, it is interesting and worth a read. Of course democracy should be retained. People must be able to throw a government – and its economic policy – out. And the franchise must be as wide as possible among competent people (i.e. adults and potentially 16/17 yr old citizens / residents) to ensure that political parties seek to consider the interests of the entire population in designing policy.
A question to ponder is – if democracy has the deficits claimed by Creighton, but should be retained as the least worst system, what remedies are there? Possibly the most practical remedy would be to raise the general level of political and economic knowledge through the mass media – something which kind-of occurred in the ’80s and ’90s but which appears to be declined since.
Introducing a constitutional or statutory maximum level of government expenditure is a short-term fix that may not be a solution at all.