Ricardian Equivalence, the Italian Fiscal Tradition and Western Australia's Government Net Debt

By McLure, Michael | Agenda: A Journal of Policy Analysis and Reform, January 1, 2017 | Go to article overview

Ricardian Equivalence, the Italian Fiscal Tradition and Western Australia's Government Net Debt


McLure, Michael, Agenda: A Journal of Policy Analysis and Reform


Introduction

The start of the 'millennium boom' can be dated as 2002-03 (Grafton 2012). The Western Australian (WA) Government was a major beneficiary of that boom, with the value of the state's export of iron ore growing hectically in response to China's booming demand for steel. Notwithstanding this, WA Government public finances have seen total government 'net debt' grow from $4 billion (or 27 per cent of total government operating revenue) in 2002-03 to $27 billion in 2015-16 (or 62 per cent of total government operating revenue); and the 2016-17 Government Mid-year Financial Projections Statement predicts that WA's total public-sector net debt will reach $39.7 billion by 30 June 2020.

The primary purpose of this paper is to interpret the growth of the Government of Western Australia's net debt from 2004-05 onwards with reference to the Italian fiscal tradition. Particular attention is given to the treatment of the 'Ricardian equivalence' between debt and taxation by Antonio De Viti de Marco (1992), under his hedonistic approach; Benvenuto Griziotti (1992), under his political approach; and Vilfredo Pareto (1975), under his sociological approach. A secondary purpose of the paper is to reflect on the primary reason for the ineffectiveness of the WA Government's budgetary framework and its associated fiscal targets from 2006-07 onwards.

Some readers may wonder about the relevance of using the views of Italian economists, formulated approximately 100 years ago, about a theory advanced by Ricardo 200 years ago, to comment on contemporary public finances in WA. But the approach is justified on three main grounds. First, following the twentiethcentury revival in the economics of Ricardian equivalence, which dates back to Barro (1974, 1979) and Buchanan (1976), there is still some contemporary relevance to macroeconomic analysis that is linked to Ricardian equivalence. Second, Public Choice is a major intellectual framework for contemporary investigations and the Italian fiscal tradition was a significant inspiration for many of the leading Public Choice scholars. For example, James Buchanan spent the 1955-56 academic year in Italy on a Fulbright scholarship, during which time he undertook research into the Italian fiscal tradition that culminated in his celebrated paper '"La Scienza delle Finanze": The Italian Tradition in Fiscal Theory' (1960). Third, the Italian literature on Ricardian equivalence has some implications for modern fiscal arrangements, even though neither 'welfare-oriented' nor 'Public Choice-oriented' studies of public finance depend on Ricardian equivalence per se.

The next section of the paper provides a general overview of the three main approaches within the Italian fiscal tradition and discusses their respective treatment of Ricardian equivalence. That is followed by a review of WA Government net debt from 2004-05 onwards and a discussion of the character of that debt with reference to the three main approaches within the Italian fiscal tradition. The final substantive section provides a reflection of the ineffectiveness of the WA Government's fiscal targets and points to a Public Choice mechanism that may have reduced the extent of, or even prevented, WA's debt problem. The study concludes that the WA Government's experience with public debt over the period considered is generally consistent with Pareto's rejection of Ricardian equivalence because debt is fundamentally a device that governments employ to win public acceptance of larger government. It is also concluded that if budgetary sustainability-without the re-emergence of ongoing fiscal imbalances-is to return to WA, targets associated with the state's fiscal strategy will need to acquire greater 'constitutional' character.

The Italian fiscal tradition

Three distinct approaches to the theories of public finance developed within the Italian tradition between the 1880s and 1920s: the hedonistic approach, the political approach and the sociological approach. …

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