In the AFR yesterday my CIS colleagues Gaurav Sodhi and Jeremy Sammut see a rare silver lining in the ideological storm clouds of the financial market meltdown. The driver of bloated government – the easy money flowing into Treasury’s coffers during a long boom – is about to slow. And
[as] government revenues  fall,  there won’t be the same scope for irresponsible spending promises. This is no bad thing. More straitened times give governments an excellent opportunity to implement unpopular measures, strike down bad policy, and enact new reforms.
History suggests that real cuts in spending are very rare, occurring only at the tail end of long periods of severe deficits. Dire fiscal necessity can let politicians get away with truly tough decisions; it is not enough that money is tight or spending programs are a waste of money. The largely petty savings in the first Rudd Budget, despite the big talk about spending constraint and the start of a new government being politically the most favourable time to make cuts, suggest how hard governments find tackling the areas that drive big-dollar spending: welfare, health, education and defence.
Though I have not seen an analysis of the number of new Budget expenditure measures over time, I would expect that the main fiscal benefits in times of budgetary constraint come from avoiding new spending programs rather than slashing old programs. While in business recessions flush out bad firms and replace them with better firms, in government it is more likely that mild recessions will just stop new programs starting, even though these may be preferable to earlier programs.
While I am less optimistic than Gaurav and Jeremy that good will come of a downturn, their op-ed is a useful reminder that in the real world policies do not go together the way they do in ideological discussions. Ideologically, the free market and small government go together, but in practice that is rarely the case. Successful free markets fuel the tax revenues that drive big government, and create the desire among voters for that money to be spent on them. And a failed market (whatever the precise cause) will push down the revenues that inflate the size of government and, if my theories about tax-and-spend opinion are correct, also create more popular support for lower taxation.