Last Wednesday (November 22, 2023), the Tory government in Britain released their fiscal update known…
The Australia government released its annual fiscal statement (aka ‘The Budget’) last night and I admit it is the first time in many years (as long as I can remember) that I haven’t actually listened to the speech. Granted at times when I have lived abroad I missed it. But usually I watch or listen to it if I can. Last night I just could not bring myself to listen to the hubris. The build up has been too much. Australia, despite our pretensions to being the ‘clever’ country, despite our high literacy rates, despite being among the wealthiest nations in the world, is a highly ignorant nation. We allow a fool (the Treasurer) to wheel out a catalogue of lies and half-truths before us every day without stopping for a second to question them. This fiscal statement is harsh, will deliberately undermine the well-being of our weakest citizens, will damage our position in the region (cutting foreign aid) and for no reason other than the government wants to hand over real income to the corporate elites at the expense of almost everyone else. When the spending cuts and tax hikes finally come into play, they will damage the prosperity of our nation. That is much more important than the media flurry about whether the Government has broken its promise not to introduce higher taxes. Of-course they broke their promises. They always do. But we should not accept actions that undermine our welfare. That is more important.
The overwhelming emphasis among those attacking the fiscal statement has been on equity issues – that is, who is bearing the burden etc. These issues deserve mention but they should not be the starting point. The first thing a fiscal stance should address is not who gets what and who bears the cost. Rather it is whether the net spending position adopted by the government is appropriate for the net spending position taken by the non-government sector, which includes households, firms and the external sector.
That is, the fiscal statement is primarily about macroeconomics – what is the state of the overall economy? Is there an output gap? Is unemployment rising or falling? What is happening to inflation? These questions relate to interrelated aggregates.
On equity matters – the fiscal statement is a disaster if you care about the weakest people in society. It not only punishes the weakest Australians but also foreshadows are harsh cutback in foreign aid – so as one of the wealthiest nations in the world we are now deliberately reducing the support we give the poorest nations in our region. Our record on foreign aid is already appalling and we are in constant default on our international obligations (in UN treaties) in this respect. This fiscal change will just elevate our pariah status. Shame is deep.
The unemployed will find no joy. Instead of creating jobs the government has decided to make it hard to receive the below-poverty line income support that the unemployment have to live on. Young unemployed Australians will now be denied any income support for lengthy periods and in between have to submit to pernicious activity tests.
The government is hacking $A80 billion out of education and health. The future will only be better if we are better educated and healthier. The government seems to ignore that.
There are so many little mean-spirited things in the fiscal statement that I will leave it to you to ferret them out and be angry about.
In terms of its macroeconomics qualifications I have listed a few facts (with graphs for those that prefer to learn that way) as context. To understand why context matters, please read the following blog – MMT Budgetary principles.
There you will see that a responsible fiscal policy requires two conditions be fulfilled:
1. The discretionary fiscal position (deficit or surplus) must fill the gap between the non-government saving minus investment minus the gap between exports minus imports.
2. When filling that gap, the government has to ensure that the non-government saving, import and investment levels are at their full employment levels.
These conditions specify a strict discipline on fiscal policy if the aim is to achieve full employment. The 2014-15 Budget fails badly when judged against these conditions. It doesn’t even consider them.
Not many other commentators seem to understand them either. The other day, there was a ‘market economist’, the type the national public broadcaster features every day as their spokespersons on the economy, raving on about the imperative to get back into surplus as soon as possible. The obvious question that the journalist should have asked is “Can you explain why we have to get back into surplus?”. Not once have I heard a journalist ask that question. It is just taken as given. That has been the standard of the debate.
There are also commentators continually raving on about the need to ‘repair the budget’. National broadcast anchors in the morning the other day were concentrating on the alleged ‘need to fix the budget’. And so it goes on – there is no meaning in the terminology – repair, deterioration, fix – when applied to the federal government fiscal balance.
Deterioration means a worsening. A government balance cannot become worse or better – it is what it is. Employment growth or unemployment – things that matter – can deteriorate and that would present a problem. But a rising government deficit is of no concern in its own right. We should understand it in the context of other events in the economy which matter – in that sense, the shifts in the fiscal position are reflective rather than being intrinsically interesting.
Further how can we view a rising deficit as a deterioration when it is clearly providing spending support for some growth?
The chief economist at Fairfax newspapers, Ross Gittins excelled today. He has taken to giving out university ‘grades’ for the fiscal performance of the government. In today’s assessment – Federal Budget 2014: Tough and unfair, it’s business as usual – Ross Gittins gave this government’s:
… first budgetary exam a distinction on management of the macro economy, a credit on micro-economic reform and a fail on fairness.
A distinction means the student has done very well. It seems that the Gittin’s College or whatever it is is following the general trend in education as funds are squeezed – the race to the bottom of the standards. I would advise no-one to enrol in his courses.
The unfortunate thing is that Ross Gittins occupies a very powerful position in Australian life. He gets to be read by a national audience at least twice a week in all the Fairfax newspapers and there is very little alternative comment ever permitted. People complain about the Murdoch News Limited press coverage. Well with guys like Ross Gittins the rival Fairfax press is not much better. A little less strident and obvious perhaps but in macroeconomic content mostly appalling.
Ross Gittins justified his distinction grade for macroeconomic performance of the fiscal statement with this logic:
Labor supporters want to believe that because Hockey and Tony Abbott are exaggerating about a ”budget emergency” and ”tsunami of government spending”, we don’t really have a problem. They are refusing to face reality.
After running budget deficits for six years in a row, we faced the prospect of at least another decade of deficits unless Hockey took steps to bring government spending and revenue back together. Failure to make tough decisions wouldn’t have turned us into Greece, but since when was that the most we aspired to?
We can disregard the snipe about Greece. The only thing that most of Australia shares with Greece is the Meditteranean climate in some regions and the fact that Melbourne is the second largest Greek speaking city in the world after Athens, given the post WW2 migration.
Australia issues its own currency and could never get into the strife that Greece is in – which is the direct result of surrendering that currency sovereignty upon joining the euro-zone. Why even mention Greece? Obvious reasons.
Fact 1 – Continuous fiscal deficits are normal
But there is the notion abroad that continuous deficits are somehow abnormal or bad. The public think – courtesy of the likes of Ross Gittins etc that responsible governments ‘balance their budgets over the business cycle’. Where did anyone get that idea from other than ideologically-laden mainstream macroeconomic textbooks that our students forced to use.
The reality is that fiscal deficits have been the norm over any of the successive business cycles. There is no evidence that Australian governments ‘balance budgets’ over the cycle.
The further evidence is that as the neo-liberal persuasion has become dominant in macroeconomic policy, Australian governments have attempted to run discretionary surpluses. The outcomes of this behaviour have not been good and overall this period (since around the mid-1970s) have been associated with lower average real GDP growth and more than double the average unemployment rate.
You can compile a reasonable dataset to explore this question spanning the period 1953-54 to the present day from two sources. The earlier data (1953-54 to 1970-71) is from the historical publication by R.A. Foster and S.E. Stewart (1991) Australian Economic Statistics, 1949-50 1989-90, Reserve Bank of Australia, Sydney.
The second time series (1970-71 to 2010-11) is from Statement 10 which is the data appendix to Budget Paper No. 1 published by the Commonwealth Government when it delivers its annual fiscal statement.
There are some issues about combining this data set and also with each individual data set. But in general the graph below is a reasonably reliable depiction to the history of Federal government fiscal outcomes outcomes over this period. The columns show the Federal fiscal balance as a per cent of GDP (negative denoting deficits) while the green line shows the average quarterly real GDP growth (averaged over the financial year at June).
The red vertical lines denote the trough of the respective business cycles. So the real GDP growth line approximates where in the year the negative real GDP growth manifested. But for our purposes it is near enough.
The upper numbers in boxes are the average deficits over each cyclical periods. The average deficit over the whole period was 0.8 per cent of GDP. The average real GDP growth per quarter from 1959-60 was 1.2 per cent and after 1975 this dropped to 0.8 per cent. The unemployment rate averaged below 2.0 per cent in the pre-1975 period and averaged around 5.5 per cent after 1975.
The 1975 Budget was a historical document because it was the first time the Federal Government began to articulate the neo-liberal argument that budget deficits should be avoided if possible and surpluses were the exemplar of fiscal responsibility.
Some points to note:
1. One the rare occasions the budget was pushed into surplus (usually by discretionary intent of the Government) a major recession followed soon after. The association is not coincidental and reflects the cumulative impact of the fiscal drag (that is, the surpluses draining private purchasing power) interacting with collapsing private spending.
2. There is no notion over this period that the budget outcome was “balanced” over the business cycle. The historical reality is that the federal government is usually in deficit. If I had have assembled more historical data which is available in the individual budget papers going back to the 1930s then it would have just reinforced the reality that surpluses have been rare in our history independent of the monetary system operating (the old convertible system or today’s non-convertible system).
3. The Australian federal government ran fiscal deficits of varying sizes in 75 per cent of the years between 1953-54 and 2014-15 (46 out of the 61 years).
4. The fact that the conservatives were able to run surpluses for 10 out of 11 consecutive years (1996 to 2007) is often held out as a practical demonstration of how a disciplined government can run down public debt and provide scope for private activity. The reality is that during this period we have witnessed a record build-up in private indebtedness (see below).
The only way the economy was able to grow relatively strongly during this period was that private spending financed by increasing credit growth was strong. This growth strategy was never going to be sustainable and the financial crisis was the manifestation of that credit binge exploding and bringing the real economy down with it.
5. The higher deficits in the recent period is testament to the fiscal stimulus package and, perversely, the fiscal contraction that followed. Remember this is a ratio of the fiscal balance to GDP. So if the numerator (fiscal balance) goes up faster than the denominator (GDP) then the ratio rises and vice-versa. But if the denominator falls more quickly than the numerator (at a time of fiscal austerity) the ratio can also rise. The previous government cut hard in their second last fiscal statement and that caused the economy to slow.
Fact 2 GDP is well below trend
The second fact is that real GDP growth is still well below its recent trend. The following graph shows the recent history of real GDP growth in annual terms. The trend line relates to the five-year period between September 2003 to September 2008. Even if we took a longer trend (say from the beginning of 2000 up to the beginning of the downturn in 2008) the result is similar. In general a trend growth rate between 3.25 and 3.5 is found for Australia.
The economic cycle is not overheating or even heading upwards. If anything a further slowdown would be expected.
Fact 3 Labour Underutilisation is high and rising
The Australian economy is far from being close to full employment. The following graph shows the ABS Broad labour underutilisation series, which simply adds the official unemployment rate to the underemployment rate. It is currently around 13.5 per cent and has been rising as the economy slowed after the retrenchment of the fiscal stimulus package.
Fact 3 Size of fiscal shift is immense
The ABC’s most-used economist (an ex Treasury official) who works for a Canberra-based consulting firm claimed today on ABC radio that the fiscal shift was not as severe as the first two Costello fiscal statements (1996-97 and 1997-98). Costello was the treasurer in the last conservative government which held office between 1996 and 2007.
Unfortunately, the Access Economics commentator (who also continually claims there is a need to “repair the budget”) is incorrect on this fact. The first two Costello shifts (being the swing in the final fiscal position in a given year relative to the previous year) are shown by the green bars (1 per cent and 1.1 per cent, respectively).
The biggest fiscal swing in the previous Conservative government’s tenure was in the financial year 1999-2000 (a shift of 1.4 per cent) which is shown in navy blue. A sharp slowdown in the economy followed that contraction and as you can see the fiscal balance was in deficit two years later (2001-02) – the only deficit they recorded in the 11 years in office. The Australian economy only returned to growth after that because the Communist Chinese government ran large fiscal deficits themselves as part of their urban and regional development strategy. That spurred demand in our mining sector.
The following graph shows the recent history (from 1970-71) of fiscal shifts. You can see that the forward estimates imply a tightening of fiscal policy. The largest fiscal shift in the sample period shown was the second-last fiscal statement from the previous Labor government in 2012-13 which was equivalent to 1.7 per cent of GDP.
That government was obsessively trying to achieve a fiscal surplus in the next year and was blind to the reality that the private sector was not going to fill the spending gap left by the retrenchment in net government spending. The result – which was totally predictable – was that the economy took a nosedive, tax revenue fell even further and the fiscal balance moved further into deficit with unemployment rising. The reversal in the fiscal balance was larger than the attempted contraction the year before (1.9 per cent compared to 1.7 per cent), which just tells you that it is folly to try to cut a deficit when private demand is weak.
In last night’s fiscal statement, the fiscal shift planned is also very large – equivalent to 1.3 per cent of GDP (some $A20 billion). That is a huge amount to be taking out of the economy in one fiscal year.
Unless there is an extraordinary pick up in private spending or net exports then the economy will not achieve the underlying growth assumed and we will be left at the end of the fiscal year with a fiscal deficit higher than they forecast and an even weaker economy than exists now.
In other words, the government is invoking a pro-cyclical fiscal policy change, which are the anathema of responsible fiscal management. Discretionary changes in fiscal policy should typically be counter-cyclical – to manage output gaps. The only time an expansionary discretionary fiscal change should be pro-cyclical is when growth is positive but not strong enough to achieve full employment. Once capacity is reached, fiscal policy should counteract non-government spending changes.
Here are some further questions the journalists should be asking but are not:
1. What reason does the government give for contracting net spending while the real GDP growth rate is falling (well below trend) and the unemployment rate is rising (well above even what the Government claims is full employment)?
2. Why would a government deliberately impose massive daily national income losses on the economy, which are disproportionately endured by the poorest members of our society?
It is also clear that the Treasury was not even remotely correct in its economic assessment. What is going on there? The simple answer is that their model frameworks are based on flawed macroeconomic theory – the same theory that led to policies around the world that caused the financial crisis.
Fact 4 The fiscal position will worsen the economy
By the government’s own forward estimates, this is a pro-cyclical fiscal shift. They are forecasting unemployment to rise to 6.25 per cent and remain at that level until at least through 2015-16 (two more years). What responsible government attacks the unemployed with the range of harsh measures in this fiscal statement yet knows that unemployment is going to worsen?
To me that amounts to a socio-pathological exercise.
They are also estimating that the participation rate will be at 64.5 per cent intil 2015-16. As I explained in the recent commentary on the latest Labour Force data release – Australian labour force data – stagnation setting in – the most recent peak in labour force participation was November 2010 where it stood at 65.9 per cent.
At present, the participation rate is 64.7 per cent and the difference between that November 2010 peak and the current rate, assuming the workers who ahve left the labour force in that period are discouraged workers, that is, hidden unemployed, adds 1.6 percentage points to the official unemployment rate. In other words, if the participation rate was at the November 2010 peak, the official unemployment rate now would be 7.4 per cent rather than the actual 5.8 per cent.
But according to the forward estimates, participation will fall by an additional 0.2 percentage points as the official unemployment rate rises to 6.25 per cent over the next two fiscal years. A quick calculation reveals that this would add a further 50 thousand workers to those already dropping out of the labour force and the adjusted unemployment rate would be around 7.8 per cent.
We also know that underemployment would be higher under these circumstances, being an additional response to a flat or deteriorating economy, so it is not inconveivable that the sum of official unemployment, underemployment and hidden unemployment (discouraged workers) could approach 18 or 19 per cent if the other parameters in the fiscal statement turn out to be accurate.
Fact 5 The private sector’s debt position is set to worse
The economic predictions, which underpin the fiscal statement and are contained in Budget Paper No.1 show that the Treasury is forecasting the current account deficit to be at 4 per cent of GDP in the coming fiscal year With a fiscal deficit estimated to be 1.8 per cent of GDP, that means they believe the private domestic sector will be spending more than they are earning by an equivalent of 2.8 per cent. That means they expect the private domestic sector to maintain the growth in the economy by increasing its indebtedness.
We are heading in the same direction as before the crisis – growth becomes reliant on private debt buildup.
The following graph shows the sectoral balances and it is clear that the recent move into overall saving by the private domestic sector is being undermined by the squeeze on private income from the fiscal retrenchment.
The following graph shows the movement in the household debt to disposable income since March 1977. The rapid rise in the ratio during the credit boom allowed households to maintain spending and was the only reason in the late 1990s that the government was able to run fiscal surpluses. Even though the fiscal drag coming from the governments surpluses was a negative factor for growth the credit-fuelled spending binge offset it.
Later the spending was also driven by the mining boom.
David Skutenko from the Australian Bureau of Statistics says the figure is not just high in historical terms, but by global standards our debt burden is among the highest in the developed world.
“We often compare household debt with household disposable income and, at the moment in Australia in 2013, it was 1.8 times household disposable income,” he said.
“In comparison to the G7 countries such as the United States – 1.1 times household disposable income. The UK – 1.5 times disposable income.”
While households in the US and UK having been paying off debts, Mr Skutenko says Australians have merely reduced the pace of their borrowing.
The whole nation is transfixed on fears that the government debt in Australia is too high – courtesy of all the scaremongering that has been going on. But nary a word gets mentioned about the dangerous private debt levels. It is true that most of the debt is owed by higher income people in Australia, which makes an insolvency crisis of the likes of the sub-prime less likely here.
But the reality is that the debt levels and the growth in them (about the same as disposable income) means that consumer spending is likely to remain fairly subdued overall. It is unlikely we will see a return to the pre-crisis period when debt grew much faster than disposable income and the resulting spending maintained stronger economic growth.
Overall, a very predictable fiscal statement from a nasty government that is keen to do the bidding of the elites and big business and use the rest of the citizens, particularly the weakest among as, as pawns in their wealth-generating activities.
It will reduce growth and increase joblessness.
It will increase hardship on those least able to cope with it.
And why? For no substantive economic reason. This is not an economic statement. The annual fiscal statement has become an annual statement of dogma from a deeply flawed economic paradigm.
The same paradigm that cause the mess is dominating the so-called solution.
That is enough for today!
(c) Copyright 2013 Bill Mitchell. All Rights Reserved.