What is the purpose of fiscal policy? Don’t ask Rachel Reeves!

It’s been a week of grand fiscal statements. Tuesday, it was for Australia as I discussed yesterday – Australian fiscal statement – rising unemployment amidst a moderate fiscal contraction (March 26, 2025). Then yesterday in the UK, the Labour Chancellor delivered the British Government’s – Spring Statement 2025. Both statements come at a time when the mainstream economics consensus is shifting with the US pushing protection and defunding many global initiatives. And, one of the statements was in the context of an impending federal election (Australia) and from a government that is in danger of losing that election to a bunch of populist Trump-copiers. And the content reflected that. The UK Statement was from a Government currently in no danger of losing office but which is progressively entrapping itself in its hubris and fiscal rules. An interesting juxtaposition. Anyway, the British Chancellor has lost all understanding of what the purpose of fiscal policy is. What is the purpose of fiscal policy? Don’t ask Rachel Reeves!

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Australian fiscal statement – rising unemployment amidst a moderate fiscal contraction

Last night (March 25, 2025), the Australian government delivered the latest fiscal statement for 2025-26 (aka – The Budget – and, in doing so tried to win renewed electoral appeal given its waning popularity and a national election that has to be held in the next 6 or so weeks. So it offered the tax cuts and other inducements to the voters. But the underlying tenor of the fiscal position is unsustainable not because it is predicting on-going fiscal deficits out to 2028-29 but because those deficits will be too small relative to other trends that are likely to occur (external sector and household consumption spending). While the commentariat has been in conniptions about ‘eye watering red ink’ for a far as we can see (their eyes are poor), the fact is that the projected fiscal deficit is about the average level since 1970-71. But in the current environment, the forecasted government contraction will damage the economy and push unemployment up further than they are forecasting. Sure enough, the Government handed out some dollops of cost-of-living relief to low-income families – a few pennies in the scheme of things and that will probably help them retain votes. But with all the challenges ahead now is not the time to be in contractionary mode. Winning the election is one thing, but neglecting a host of existential matters in the medium term is not the way to go.

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British government spending cuts will probably increase the fiscal deficit and make the ‘non negotiable’ fiscal rules impossible to achieve

The British press are reporting that the Government there is planning further spending cuts of the order of billions of pounds because the economic environment has changed and the current fiscal trajectory is threatening their self-imposed fiscal rules thresholds. We already heard last week how the Government is significantly cutting Overseas Aid as it ramps up military expenditure. Now, it is reported that billions will be cut from the welfare area and the justification being used is that there is widespread rorting of that system by welfare cheats. There are several points to make. First, getting rid of rorting is desirable. But I have seen no credible research that suggests such skiving is of a scale sufficient to justify cutting billions out of welfare outlays. Second, quite apart from that question, the micro attack on the welfare outlays have macroeconomic consequences. The British Office of Budget Responsibility estimates that the output gap is close to zero which means it is claiming there is full employment. Even if that is true, that state is underpinned by the current level of government spending (whether it is on cheats or not). If the spending cuts that are targetting rorting are not replaced by spending elsewhere then a recession will occur and the Government will surely fail to achieve its ‘non negotiable’ fiscal rule targets. It is a mess of their own making.

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Britain and its fiscal rule death wish

Governments that adhere to the mainstream macroeconomic mantras about fiscal rules and appeasing the amorphous financial markets have a habit of undermining their own political viability. As Australia approaches a federal election (by May 2025), the incumbent Labor government, which slaughtered the Conservative opposition in the last election, is now facing outright loss to a Trump-style Opposition leader if the latest polls are to be believed. That government has shed its political appeal as it pursued fiscal surpluses while the non-government sector, particularly the households, endured cost-of-living pressures, in no small part due to the relentless profit gouging from key corporations (energy, transport, retailing, etc). The government has not been riven with scandals or leadership instability. But its amazingly fast loss of voting support is down to its unwillingness to take on the gouging corporations and also to claim virtue in the fiscal surpluses, while the purchasing power loss among households has been significant. The same sort of death wish is arising now in the UK, although the British Labour government is at the other end of its electoral cycle which gives it some space to learn from its already mounting list of economic mistakes. The British government situation is more restrictive than the case of the Australian Labor government because the former has agreed to voluntarily constrain itself via an arbitrary fiscal rule.

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Economics as politics and philosophy rather than some independent science

Last week, I wrote about – The decline of economics education at our universities (February 6, 2025). This decline has coincided and been driven by an attempt by economists to separate the discipline from its roots as part of the political debate, which includes philosophical views about humanity and nature. In her 1962 book – Economic Philosophy – Joan Robinson wrote that economics “would never have been developed except in the hope of throwing light upon questions of policy. But policy means nothing unless there is an authority to carry it out, and authorities are national” (p.117). Which places government and its capacities at the centre of the venture. Trying to sterilise the ideology and politics from the discipline, which is effectively what the New Keynesian era has tried to do, fails. The most obvious failure has been the promotion of the myth of central bank independence. A recent article in the UK Guardian (February 9, 2025) – You may not like Trump, but his power grab for the economic levers is right. Liberals, take note – is interesting because it represents a break in the tradition of economics journalism that has been sucked into the ‘independence’ myth by the economics profession.

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Australian government announces a small shift in the fiscal deficit and it was if the sky was falling in

Yesterday (December 19, 2024), the Australian government published their so-called – Mid-Year Economic and Fiscal Outlook 2024-25 (MYEFO) – which basically provides an updated set of projections and statuses of the fiscal position six months after the major fiscal statement was released in May. One would have thought the sky was falling in given the press coverage in the last 24 hours. The standard of media commentary in Australia on fiscal matters is beyond the pail.

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Classic deception from the Australian Treasurer

There is a pattern. Start with an aim which usually involves advancing the interests of some powerful lobby group. It is known that if the citizens realise that there is special pleading going on they will not be supportive. The solution – create some metaphorical language that will help convince us that the aim is worthwhile and legitimate. Then add a dose of ‘technical’ sounding language and some ‘scientific’ sounding concepts (for example, NAIRU), which ensures that only the metaphors, which have common parlance, resonate and the ‘detail’ is not challenged. Especially exploit the fact that most people are too embarrassed to question so-called ‘experts’ for fear of being humiliated for displaying ‘ignorance’. That is how fictional macroeconomics becomes mainstream and that is how we all become passive agents in spreading the fiction. The Australian Treasurer was at it again over the weekend after he had been rubbing shoulders with other Finance Ministers, Chancellors, and Treasurers in Washington D.C. at the annual IMF/World Bank meetings, which are akin to those evangelistic religious festivals where everyone is geedup – with a sense of self-importance and sanctimonious zeal.

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The EU is in terminal decline

Some Wednesday snippets. First, I juxtapose the political machinations that the EU President is engaged in to consolidate and expand her power within the European Commission with the reality that Member State governments are becoming dysfunction because social instability and political extremism are rife. Then I reflect on my experience as Chancellor of Britain – a great success I should say, although I was told I had broken all the rules. It tells one how stupid the rules are. Then, finally, some music to enjoy.

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British Chancellor fails the basic test – language is meant to impart meaning

Language is meant to bring meaning to discourse. That means we want to use terms that convey information that is of use to us in making our way in the world. The problem is that economists have perverted that process and introduced a metaphorical language that is intended to persuade the reader/listener to accept a particular view of the world but which undermines their ability to actually understand the phenomenon in question. Marx knew long ago how language could be constructed to advance the interests of the ruling class. The mainstream economics commentary that is also used by politicians falls into this category. Terms are used that have no meaning in an elemental sense but provide support for ideological agendas. We, the public, allow that to happen because we are ignorant about the context. It becomes a vicious cycle of lies and fictions which undermine human and environmental sustainability but certainly transfer income to the top-end-of-town. A recent path setting address to the House of Commons by the new Chancellor is a classic example of this reality denial.

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Australian government tax cuts – the most vulnerable are being hoodwinked

I am still catching up after being away in the UK last week. I will reflect on that trip in another blog post. So, today, we have a guest blogger in the guise of Professor Scott Baum from Griffith University who has been one of my regular research colleagues over a long period of time. He indicated that he would like to contribute occasionally and that provides some diversity of voice although the focus remains on advancing our understanding of Modern Monetary Theory (MMT) and its applications. Today he is going to talk about income tax cuts and cost of living relief. Over to Scott …

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