It was interesting to spend a few weeks in London recently and catch up with…
Knighthoods are handed out as part of the anachronistic Commonwealth honours system. They are an ultimate symbol of cultural snobbery in the UK and cultural cringe in the former British colonies, such as Australia. The Australian government effectively abandoned the system in 1983 because it insulted our sense of independence even though the Monarch of England remains our head of state (why?). It was formally abandoned by agreement with the British government in October 1992. But the creepy conservative government that took over again in September 2013 decided to reinstate the system of imperial honours, specifically to resume the award of Knight and Dame in March 2014. This demonstrated how out of touch the conservatives were. The criticism reached fever pitch a few weeks ago – on Australia Day (January 26, 2015) when it was announced that Prince Phillip (the Queen of England’s husband) would receive a Knighthood, the nation’s highest honour, from the Australian government. Why? Because our Prime Minister is unbelievably stupid but that is another debate beyond of the topic of today’s blog. This UK Guardian article – How giving Prince Philip a knighthood left Australia’s PM fighting for survival – will fill you in on that decision if you are interested. Now a so-called media watchdog, the Australian media site Crikey thinks the Federal Treasurer should be awarded a Knighthood if he can further undermine economic growth and deliberately cause unemployment and underemployment to rise further, not that they said it like that.
For overseas readers the term Crikey is rather outdated Australian slang which means an “expression of astonishment” (Source). Similar old slang expressions are Blimey (stone the crows) and Strewth!
But Crikey is also a media organisation that runs a subscription news service that they claim – “acts as a vital check and balance on the activities of government, the political system and the judiciary”. It claims to be a bulwark in providing “public scrutiny” of important developments in Australia.
It claims to be “a showcase for information that might otherwise remain suppressed” and to be transparent in what it does. It claims be about “fair and open … journalism” as opposed to what?
Its revenues comes from subscriptions and advertisements so it is just another commercial operation.
It also uses the language of neo-liberalism to discuss fiscal policy issues thus emotively misrepresenting to its readers what is really happening – so much for being a source of truth.
It also perpetuates the standard mainstream economic myths about fiscal policy, which means it is deceiving its readership rather than providing them with knowledge and accurate reporting.
On that basis alone, I would not recommend subscribing to the service.
Their latest commentary (January , 2015) – Remember Labor’s ‘skyrocketing debt’? The Coalition’s is much worse – is demonstrative of this appalling lack of understanding of the reality of the topic that their commentator is claiming to be an expert in.
The article also assumes Crikey’s usual – “we are breaking big news” here – they like to think of themselves as the news service that breaks stories that other media agencies either haven’t understood the importance of or are unwilling to report.
There is nothing ‘breaking’ at all about the financial data they report (it is part of the standard reporting cycle of the Department of Finance in Australia) and the controversial aspects of the data are actually ignored by the article.
Last week, the – Australian Department of Finance – released the – Australian Government Monthly Financial Statements December 2014 – which allows us to see the full fiscal accounting data for 2014.
These are monthly statements going – Back to 1999.
The following graphs will aid the discussion.
The first graph shows the Annual Change in Commonwealth Net Debt ($A millions) as at the end of December in each of the years shown.
The previous federal government (Australian Labor Party) was in office from December 2007 until September 17, 2013. The current conservative government took office in September 2013.
The previous government had to deal with the GFC and initiated two large stimulus packages in 2008, which ultimately showed up as a rise in net debt, given the unnecessary practice of issuing debt to the private sector to match the fiscal deficit.
The change in public debt is just an accounting record of the fiscal deficits in the respective periods under these unnecessary institutional rules. There is nothing of particular interest in the graph from a macroeconomic perspective although from a political perspective (which is the intent of the Crikey article) there is clearly interest.
The fiscal deficit rose for two reasons:
1. The GFC triggered the fiscal automatic stabilisers and tax revenue declined sharply and welfare payments rose. That cyclical effect, which is built into the fiscal balance outcome would have pushed the government deficit up even if the government had sat on its hands and let the crisis unfold.
The cyclical effect tells us that the final fiscal outcome is typically driven by the spending (and saving) decisions of the non-government sector (external sector, households and firms). It is not an outcome that the government can particularly control or target and nor should it.
It reflects the state of the real economy which is where the policy targets should be expressed – that is, high employment growth, sustainable output growth and the like. The fiscal balance will just act as a measuring gauge for what is going on in the real economy and as no intrinsic interest or importance in its own right.
2. The discretionary fiscal stimulus packages manifested in the form of increased spending, mostly on infrastructure.
The ALP government then went crazy and bent to the pressure from the conservatives regarding the deficit and the associated build up of net debt. The sky was about to fall in – or so it was claimed.
So by 2013 it had cut hard into public spending and the result was a decline in net debt. The problem with that strategy was that the public spending cuts embodied in their pursuit of austerity led to a slowing economy and rising unemployment.
By the time the conservatives took office on September 18, 2013, the economy was in a poor state with real growth well below trend and declining fast, inflation falling, employment growth below the growth of the labour force and unemployment rising.
The fiscal manifestation of that real disaster was further declining tax revenue for the Commonwealth government and a failure to stem welfare payments despite their vicious efforts to penalise those on income support.
The result was obvious – the fiscal deficit has risen and with it net debt has risen much more in the last year than in the previous two years.
The current government could have accepted that it inherited an ailing economy as a result of the obsession of the last government with pursuing fiscal surpluses at a time that the external sector was draining overall spending and private domestic spending was insufficient to support even a trend rate of growth.
But it had demonised the previous government and during the 2013 federal election campaign had relentlessly told the public that there was a fiscal and debt emergency, which required immediate treatment. If left untreated interest rates and inflation would explode, the goverment would run out of money and the rating agencies would cut our AAA rating.
All nonsense of course but it was a smokescreen to allow them to engage in their ideologically-motivated cuts in public net spending, which backfired because the private economy was slowing fast.
So the fact that the net debt has risen in 2014 is highly political – it shows that the government was lying when in opposition about the debt emergency (nothing much has happened – interest rates have declined and inflation is falling).
It also shows that the government is incompetent by its own twisted and wrongful logic because it promised to significantly cut the fiscal deficit and net debt.
It hasn’t succeeded – (thank goodness) – because the austerity-oriented policy mix has further undermined real growth and tax revenue. I say thank goodness because the situation would have been worse had they been able to cut as hard as they wanted to. They have been held up somewhat by a hostile Senate.
The next graph provides further detail. It shows the monthly change in $A millions in the Commonwealth net debt positions (what is owed compared to what it owes) from December 2007 until December 2014. The data is derived from the monthly balance sheets (with the June data observation in each year being linearly interpolated due to the lack of reporting in that month).
The blue columns coincide with the previous federal government (Australian Labor Party) and the red columns show the current conservative government.
The horizontal lines are the average monthly change for the two periods.
So even with the GFC on their hands, the previous Federal government added less debt on average to the stock than the current conservative government even though the current regime has claimed the ALP was hopelessly profligate and poor economic managers.
The current government never talks about the GFC. They always talk about the movements in debt because they know the public are less able to understand the intricacies of fiscal balances.
But even on their own logic the conservatives had added more public debt per month on average than the previous ALP government.
That is the intent of the Crikey article and in that sense it is correct. The conservative government are incompetent liars and hypocrites.
But that is the only positive thing the Crikey article adds.
If you bother to read it you will see phrases/words such as:
1. “a hefty increase” in debt. What separates a hefty increase from a non-hefty?
2. “the Coalition will have blown out Labor’s debt” – blown out – as if out of control or something.
3. “improvement in the budget bottom line” evidenced by falling debt.
4. “continuing debt blow-outs”.
A fiscal balance can neither improve nor deteriorate. The fiscal deficit can rise and fall but adding qualitative descriptors to those movements like improve or deteriorate make no sense as it stands and reflects the flawed notion that a rising deficit is bad and vice versa.
We can only add these qualitative descriptors when we consider what is simultaneously happening to the real economy – real GDP growth and unemployment, for example.
So a fiscal deficit that moves from 2 per cent of GDP to 4 per cent of GDP might be ‘bad’ if it is being driven by automatic stabilisers that reflect a rapid decline in output growth and employment and a loss of income (leading to falling tax revenue).
But then the same shift (from 2 to 4) could be ‘good’ if it associated with discretionary government policy action aimed at increasing overall spending and output, which increases employment growth and national income and reduces unemployment and poverty.
Same direction of movement, same quantum but totally different outcomes and interpretations. That is why context-free descriptors such as ‘improvement’ or ‘deterioration’ which only relate to whether the fiscal deficit is falling or rising are meaningless and only used by those who do not understand the concepts fully.
Of course, these terms are central to the language of the neo-liberals (aided by the mainstream economists) who want us only to focus on the financial ratio while suppressing any discussion of the real economy.
The Crikey article doesn’t mention unemployment once
The Crikey article then waxes lyrical (trying to give the impression it understands things beyond the hysterical political commentary that other media outlets engage in along with the politicians) about the fact that:
Of course, this debt increase is not of any immediate economic concern. A case can be made that Australia’s borrowings in recent years have been much too low given negative real interest rates and the need for investments in productive infrastructure.
Australia’s net debt is only about 15% of its gross domestic product, even with the recent surge under the Coalition. That is well below levels in Switzerland, Canada, Germany and the UK - all of which have triple-A credit ratings and no problem.
Which is as asinine as it gets.
The public debt level relative to GDP is not a matter of economic concern ever if the government in question issues its own currency and only issues debt in that currency.
Under those circumstances the government can always service its nominal liabilities and the public debt ratio is an irrelevant focus of attention.
At any time of its choosing, the government could cease to issue public debt and continue deficit spending at will. It might have to change some regulations and statutes which have been put in place to give the impression that the debt issuance is funding its net spending, but that would be merely legislative activity.
Remember the government just borrows back what it spent in deficit in a previous period. Bond sales draw on private saving which is just a reflection of past deficits.
Further, as noted above, these financial ratios are just signals of what might be going on in the real economy.
Please read the following introductory suite of blogs – Deficit spending 101 – Part 1 – Deficit spending 101 – Part 2 – Deficit spending 101 – Part 3 – for basic Modern Monetary Theory (MMT) concepts if you need a refresher.
The Crikey article then considers the future. It says:
If declining revenues and increasing outlays continue, greater debt must be the result. With the government now under unprecedented pressure, can Hockey effect the drastic measures needed to turn this around?
If he can, he deserves a knighthood.
Which takes us back to the beginning.
If the Government was able to cut discretionary net spending harder than the automatic stabilisers were pushing it up then the damage done to the real economy would be dramatic at this stage of the cycle.
Unemployment would rise sharply – further than it already is – and national income would fall. We would certainly enter a recessionary period.
How is it that such vandalism would deserve our highest honour – quite apart from the stupidity of having an honours system anyway?
You can see why I wouldn’t subscribe to the Crikey media service under any circumstances.
All of its self-promotion aside, this article reduces the public’s understanding of these important matters rather than enhances it.
That is enough for today!
(c) Copyright 2015 William Mitchell. All Rights Reserved.