Wealth has to be created before it can be distributed. To create wealth, both demand and supply need to be in balance.
By demand I mean the overall purchases of Australian goods and services by us and foreigners. By supply, I mean the ability of our workforce to provide world standard products in an efficient way.
The recent Federal Budget speaks well to the demand side. The economy is sagging and without a reasonable stimulus from the government sector, we will sink further.
Central governments, which control their own money supply, should not aim for a budget surplus. This is the lesson developed countries learnt from the Great Depression in the 1930s.
Deficits do not need to create public debt as deficits can be monetised and monetisation is quite benign so long as it does not escalate inflation. We are a long way from an inflation problem but a near way to an unemployment problem.
The US has pulled itself out of the sharp recession of the 2008 by monetising its public sector debt – there is a lesson for us there.
Commentators who cry about the need to return to surplus are harking back to 19th century economics. There is little to recommend this style of policy unless you actively want an economy that swings wildly between boom and bust.
So much for the stimulatory part of the Budget. But what about the supply side? Here the Budget was disappointing.
The funds for medical research are based on savings from the health budget so it is unclear how much money will flow to research and whether the target will be reached despite a $1 billion start-up been promised. The $150 million research infrastructure grant and other funding for the Australian Research Council appear to have been taken from elsewhere in the research budget.
Tax cuts, although stimulatory and therefore good, do not build capacity.
Road, transport and infrastructure in the Northern Territory, may reduce the cost of doing business there but will only have an indirect effect on our ability to develop better and cheaper products that can be exported.
The Budget is mostly silent on what is happening elsewhere in the research and innovation space.
To export, and be part of the global production system, we need to understand where the high value jobs are coming from. The evidence around the world is that value is being sourced to an increasing degree from analytic, inventive and creative ideas.
In addition, production chains are becoming increasingly global. To survive as a high-income country, we need to break into these production chains. We only have a toe in the water at present.
Compared with other developed countries Australian industries are poorly connected with research institutes and universities and we are not well integrated into global production chains.
Astute countries such as the US, Germany and the low lands of Belgium, Netherlands and Denmark operate government funded schemes that underpin the risk of innovation for business and create networks of trust and collaboration between the research sector and businesses.
The rise and dominance of Silicon Valley would not have happened without the US Department of Defence’s Defence Advanced Research Projects Agency (DARPA) and the US Department of Energy’s Advanced Research Projects Agency - Energy initiatives.
The Small Business Innovation Research (SBIR) programs in the US are legendary for co-investing in the successful commercialisation of frontier technologies.
The Fraunhofer Institutes make Germany a leader in applied research as well as encouraging a flexible, autonomous and entrepreneurial approach to the society's research priorities.
Recently, the UK has embarked on the Catapult scheme designed to increase the country’s innovation capabilities and drive economic growth.
Sadly, the Budget contains none of these important measures to stimulate a mature and sophisticated innovation system in Australia.
On the bright side, getting the six per cent of unemployed Australians into jobs is the best way for society to directly, or indirectly, avoid a budget blowout from an ageing population. A stimulatory budget now is therefore best for a healthy long run budget position.