I read an article in the Financial Times earlier this week (September 23, 2023) -…
The Australian government will release the Fourth Intergenerational Report today with much fanfare, scaremongering and lies. Our boofhead Treasurer has been doing the rounds of the media outlets giving his evangelical sales pitch on how scary the future is unless we cut the fiscal deficit now and get the balance back in surplus as soon as possible. These intergenerational reports are really a confection of lies, half-truths interspersed with irrelevancies and sometimes some interesting facts. There is very little economics in these reports. What parades as economic analysis is just the usual neo-liberal mainstream nonsense that currency-issuing governments have run out of money and fiscal deficits are dangerous. The Treasurer is selling the Report on the grounds of “intergenerational theft” (the classic anti-fiscal deficit argument about mortgaging our future grand children’s future). Apparently, this justifies large cuts to the fiscal deficit now in order to turn it into a surplus so that our future generations are left with no debt. The real intergenerational theft though is embodied in a current fiscal strategy that leaves around 45 per cent of our teenagers unemployed, underemployed or NEET (Not in Education, Employment or Training) and hacks into public infrastructure provision as a strategy to create fiscal surpluses now. With private spending subdued at present and the external sector also draining expenditure from the economy relative to its income, trying to impose fiscal austerity now in the name of defending future prosperity is a grand lie and will ensure that the future prosperity is undermined.
I wrote about these matters in the following blogs among others:
- Democracy, accountability and more intergenerational nonsense
- Another intergenerational report – another waste of time
- The rising future burden on our kids
- When 50 per cent youth unemployment is (apparently) protecting the grand kids
- Our children never hand real output back in time
- 66,592 children relieved of debt burdens by their parents
- Lower deficits now, undermine our grandchildren’s future
Those blogs countenance all of the arguments that are put forth in these tawdry political exercises designed to convince the public that they should lower standards of public services and higher unemployment because it is good for their grandchildren.
There is very little economic content in these IGRs. They are crafted by the Treasurer’s own office to serve the current political needs and to dampen down protests from the rich and high income donors to the political parties that their suite of welfare handouts will remain intact. Both sides of politics have fallen into the same pattern.
The genesis of these reports goes back to the Charter of Budget Honesty Act 1998, brought in by the previous conservative government, who ironically were one of worst lying governments in our history.
The Act was neo-liberalana at its best as you will glean from its Purpose:
The Charter of Budget Honesty provides a framework for the conduct of Government fiscal policy. The purpose of the Charter is to improve fiscal policy outcomes. The Charter provides for this by requiring fiscal strategy to be based on principles of sound fiscal management and by facilitating public scrutiny of fiscal policy and performance.
Section 12(4) has often been used by successive treasurers to suppress information.
The Act requires the government issue these intergenerational reports every 5 years although the current report is overdue as a result of the political manipulation that the Treasurer has been engaged in to ensure the release is just before the next fiscal statement.
He wants to create political space to hack into government spending.
The routine is this:
1. Invent some assumptions about the next 40 years.
2. Produce some scary graphs and if the first effort doesn’t produce scary enough graphs change the assumptions until you get them scary enough.
3. Convince the public that a few lines going off the top of a graph is actually scary and will undermine their future.
4. Ring your mates in the business and financial sectors and assure them that all corporate welfare will be maintained if not increased.
5. Cut the rest of public spending, deliberately increase unemployment and harass those on income support all in the name of those lines going off the top of the page.
Both major political parties have done this.
This is the fifth IGR. Each one claims that “Failure to act now to tackle intergenerational challenges will result in severe economic, fiscal and environmental consequences” (from the 2010 Report, Page 2).
The familiar line we have been reading for years – cut now or else.
The Japanese have been hearing that since the early 1990s – 25 years of it. The financial commentators and conservative economists have predicted the end of the world in Japan countless times but still the sun shines.
There are some things that are useful about a forward looking exercise.
Government has to always be forward looking and accept that its fiscal position will reflect changing challenges in terms of providing adequate public services and infrastructure while always be seeking to ensure that aggregate demand is sufficient to maintain production at the levels required to fully employ the available workforce.
In that sense, workforce projections etc are a useful (if not essential) part of a properly planned and managed fiscal policy.
Here are a series of Lies denoted Lie #, there are so many I thought I might lose count, that the Treasurer and his cronies in the financial press will be bombarding the public debate with over the next several days and weeks.
Lie # – Youth unemployment crisis in Australia is not the central issue
In the context of the parlous state of the youth labour market and the claims about the need for higher future productivity etc that pervade the Intergenerational Reports, I have been pointing out the fallacy of maintaining no hope for our future workforce as dependency ratios rise.
I did an interview for the ABC Radio National Breakfast program on Tuesday on youth unemployment.
I also did an interview this week (March 2, 2015), with Sydney radio station 2ser on the topic of unemployment.
You can listen to the – Segment. My contribution starts at around 21 minutes of the 27.57 segment.
The media is finally starting to see this situation as a crisis.
More information on the latest youth unemployment statistics from my regular – Monthly Labour Force commentary.
Youth are the key to future higher productivity. I have more to say below on this.
Lie # – National government finances can deteriorate over time
From the perspective of Modern Monetary Theory (MMT) perspective, federal finances can be neither strong nor weak but in fact merely reflect a “scorekeeping” role. We have learnt that when Government boasts that a $x billion surplus, this is tantamount to saying that non-government $A financial asset savings recorded a decline of $x billion over the same period.
Thus if the Government is really believing it will achieve the fiscal surpluses into the future then they must be wanting the non-government $A financial asset savings to decline by an equal amount.
Given that Australia will surely be running current account deficits over this period, the Government is claiming it will be fiscally responsible if it deliberately drives the private domestic sector (as a whole) into further indebtedness. That is a consequence of their projections.
Of-course, it is highly unlikely that they will achieve these fsical surpluses if the private domestic sector continues to move back into positive saving. Then the external balance would have to swing into a large surplus which is not likely at all.
So the consequences of a policy strategy that aims to generate those fiscal surpluses will be chronic slowdown in growth and rising or persistently high unemployment.
The ambition which seeks to reduce net public debt is also equivalent to saying that non-government holdings of government debt will fall by the same amount over this period. In other words, private sector wealth will be destroyed in order to generate the funds withdrawal that is accounted for as the surplus.
In a financial sense, this is madness.
Once we appreciate these equivalents we would conclude that this draining of financial equity introduces a deflationary bias that will constrain output and employment growth and keep unemployment and underemployment at unnecessarily high levels. It will clearly also force the non-government sector to rely on increasing debt to sustain consumption.
It is an unsustainable growth strategy and the last thing you should be doing when faced with the dependency ratios that I will talk about later.
The entire logic underpinning the intergenerational debate is flawed. Financial commentators often suggest that surpluses in some way are equivalent to accumulation funds that a private citizen might enjoy. This has overtones of the regular US debate in relation to their Social Security Trust Fund.
This idea that accumulated surpluses allegedly “stored away” will help government deal with increased public expenditure demands that may accompany the ageing population lies at the heart of the intergenerational debate misconception. While it is moot that an ageing population will place disproportionate pressures on government expenditure in the future, it is clear that the concept of pressure is inapplicable because it assumes a financial constraint.
A sovereign government in a fiat monetary system is not financially constrained.
There will never be a squeeze on “taxpayers’ funds” because the taxpayers do not fund “anything”. The concept of the taxpayer funding government spending is misleading. Taxes are paid by debiting accounts of the member commercial banks accounts whereas spending occurs by crediting the same. The notion that “debited funds” have some further use is not applicable.
When taxes are levied the revenue does not go anywhere. The flow of funds is accounted for, but accounting for a surplus that is merely a discretionary net contraction of private liquidity by government does not change the capacity of government to inject future liquidity at any time it chooses.
The standard government intertemporal constraint analysis that deficits lead to future tax burdens is ridiculous. The idea that unless policies are adjusted now (that is, governments start running surpluses), the current generation of taxpayers will impose a higher tax burden on the next generation is deeply flawed.
The government constraint is not a “bridge” that spans the generations in some restrictive manner. Each generation is free to select the tax burden it endures. Taxing and spending transfers real resources from the private to the public domain. Each generation is free to select how much they want to transfer via political decisions mediated through political processes.
When modern monetary theorists argue that there is no financial constraint on federal government spending they are not, as if often erroneously claimed, saying that government should therefore not be concerned with the size of its deficit. We are not advocating unlimited deficits. Rather, the size of the deficit (surplus) will be market determined by the desired net saving of the non-government sector.
This may not coincide with full employment and so it is the responsibility of the government to ensure that its taxation/spending are at the right level to ensure that this equality occurs at full employment. Accordingly, if the goals of the economy are full employment with price level stability then the task is to make sure that government spending is exactly at the level that is neither inflationary or deflationary.
This insight puts the idea of sustainability of government finances into a different light. The emphasis on forward planning that has been at the heart of the ageing population debate is sound. We do need to meet the real challenges that will be posed by these demographic shifts.
But if governments continue to try to run surpluses to keep public debt low then that strategy will ensure that further deterioration in non-government savings will occur until aggregate demand decreases sufficiently to slow the economy down and raise the output gap.
Lie # – intergenerational problem is about high income earners not paying enough tax
There was an interesting (and rare) account of this farce in the Fairfax media this morning (March 5, 2015) – Intergenerational report prepared by Baby Boomers who had the best deal of any generation.
The author is listed as a former “senior adviser to Prime Minister Julia Gillard and Premiers Bracks and Brumby”, all Labor Party politicians so it is clearly a partisan attack on the current conservative government. The Labor governments have the same blood on their hands.
They were in Federal government when the GFC hit and to their credit they quickly ramped up the fiscal deficit to combat the private spending collapse.
They should have increased it by more than they did, but the action they took prevented a recession from occuring in 2009. Most of the advanced world slid into major recession and many nations are still to come out of it fully.
However, by 2011, the Labor government was spouting this ‘intergenerational’ nonsense and starting obsessively talking about ‘getting back into surplus’. The fiscal shift in 2012 designed to achieve that goal has undermined economic growth and set in place the factors that now see the unemployment rate well above the worst of the GFC period.
Underemployment has also risen and the participation rate is well below the November 2010 (local) peak.
The current Conservative government has just built on Labor’s surplus obsession not created it.
So if the author (Nicholas Reece) was giving advice at that time he has surely made a convenient shift in narrative in today’s article or has had a convenient memory loss.
Reece notes correctly that the current Prime Minister and Treasurer and many of the worst deficit terrorists (my words not his):
… are part of the Baby Boomer generation born between 1946 and 1965 – a group that has benefited more than any other in history from the generous bosom of the state. That support has undoubtedly helped make them the successful people they are today, but now they are using their time in power to deny those benefits to future generations.
I am also part of that generation that enjoyed the benefits of the strong social democratic full employment state in the Post World War II period.
I came from a poor, housing commission background and went to under-resourced public schools. The housing estate I grew up on was (at that time) on the periphery of the city and was one of many new estates built by the State after the War to house returning soldiers who were on low incomes.
The houses were small, poorly built and the area had little infrastructure.
But there was full employment (so our fathers worked), scholarships to keep those with scholastic talents at school, apprenticeships to absorb those who were skilled in craft-type activities, and plenty of income support for low income earners (low rents on the housing estate, low cost public transport etc).
There was true upward mobility. A child from a poor working class suburb could overcome their parents’ disadvantage. Income inequality was significantly reduced in that period and there was job security for all.
That has all changed.
As Reece notes – my generation that benefited significantly from the ‘Welfare State’ has now turned on our children and, by implication, their children.
He lists several ways:
1. “When the Prime Minister and Treasurer received their university education it was free. Someone seeking the same qualifications today can easily pay more in tuition fees than Abbott or Hockey paid for their first home”.
2. “When Abbott and Hockey were trying to enter the workforce for the first time … Australia had a civilised social welfare net for those who struggled to find work … now in the name of “intergenerational theft” the Abbott government is trying to … [deny] … a person under 30 access to the dole for six months”
3. “The Prime Minister also had young children in a health system that was free – without punishingly high private health insurance premiums.”
4. “generous tax breaks on property and capital gains, has allowed the Baby Boomers to invest heavily in the housing market. This in turn has led to rapidly rising property prices that have seen the Baby Boomers make a motza while locking many young prospective homebuyers out of the market forever.”
5. “high-income Baby Boomers find themselves in luck again, with superannuation tax lurks that would make a Bermuda tax official blush.”
All of this is true and demonstrates that successive governments under this neo-liberal yoke have acted in the interests of a small cohort of wealthy adn high-income Australians at the expense of the rest.
He doesn’t mention the fact that the Government has overseen, and deliberately created, a labour market where at least 18 or 19 per cent of all working age persons willing to work cannot find work in other way or another (unemployed, hidden unemployed or underemployed).
The youth labour underutilisation is around 45 per cent at present (Greek or Spain proportions) once you take into account the severe drop in the participation rate in the last 5 years, the extent of their underemployment and the 20 per cent official unemployment rate.
The attack on the young via poor labour market prospects, underfunded public education systems, defunding of the main public training colleges (TAFE) and the rest of it documented by Reece is a public disgrace and belies the narrative that the Government is trying to ram down our throats – that we have to cut now to help our children and their children.
We are robbing the current youth of a life now and undermining their future prospects.
But then Reece (consistent with his role as an adviser to previous Labor governments and their demonstrated behaviour) doesn’t understand the true nature of the intergenerational problem.
He thinks there is a fiscal emergency but that the current Government is just handling it in the wrong way. He writes:
Yet government transfers from younger to older cohorts are now so large that future budgets may not be able to afford them as the population ages. In other words, the generational bargain is at risk. This complex truth should not in any way excuse the well-off Baby Boomers from now doing some very heavy lifting to get the budget onto a sustainable footing.
QED. Another neo-liberal who thinks being progressive is about fairness while accepting all the neo-liberal shams about the financial limitations on government spending.
So his solution is to increase taxes on the high income earners and use the cash to help build public infrastructure that will benefit future generations.
The classic mistake that progressives make. If the Australian Labor Party do not quickly abandon that mindset then they will continue to make the same mistakes they made in the past should they ever get back into office.
There may be a good reasons to increase tax rates on high-income earners and corporations, introduce a wealth tax and generally reduce the purchasing power of a specific cohort in society.
But those reasons will never have anything to do with raising more money for the Federal government so that it can build better infrastructure.
If there are real resources available, the government can always buy them at any time to build whatever public goods they consider to be desirable.
Lie # – the ageing problem is financial
Intergenerational reports talk about the rising dependency ratio. Does this ratio matter? The answer is yes, definitely, but not in the way that is usually assumed.
The standard dependency ratio is normally defined as 100*(population 0-15 years) + (population over 65 years) all divided by the (population between 15-64 years). Historically, people retired after 64 years and so this was considered reasonable. The working age population (15-64 year olds) then were seen to be supporting the young and the old.
The aged dependency ratio is calculated as: 100*Number of persons over 65 years of age divided by the number of persons of working age (15-65 years).
The child dependency ratio is calculated as: 100*Number of persons under 15 years of age divided by the number of persons of working age (15-65 years).
The total dependency ratio is the sum of the two. You can clearly manipulate the “retirement age” and add workers older than 65 into the denominator and subtract them from the numerator.
Previous calculations (see Another intergenerational report – another waste of time) reveal that three projected ratios for a retirement age of 65 at 2050 would be 63.8 per cent (total); 27.3 per cent (child) and 36.5 (aged). However, if you raised the retirement age to 70, the numbers drop to 50.6 per cent (total); 25.1 per cent (child) and 25.5 per cent (aged).
The Government has already signalled it will rise to 67 in 2023. With longer life-expectancies the pressure will be on to work longer.
While there is a lot of hysteria about the dependency ratio what it means is that in 2010 there are 2.05 people of working age to every person who is not of working age. This will fall to 1.57 in 2050 on the basis of ABS demographic projections.
However, the so-called effective dependency ratio, which is the ratio of economically active workers to inactive persons, where activity is defined in relation to paid work, provides a more accurate indicator of the burden on the current workforce.
The effective dependency ratio recognises that not everyone of working age (15-64 or whatever) are actually producing. There are many people in this age group who are also “dependent”. For example, full-time students, house parents, sick or disabled, the hidden unemployed, and early retirees fit this description.
I would also include the unemployed and the underemployed in this category although the statistician counts them as being economically active.
If we then consider the way the neo-liberal era has allowed mass unemployment to persist and rising underemployment to occur you get a different picture of the dependency ratios.
Some simple calculations (see Another intergenerational report – another waste of time) show that in 2010, the standard dependency ratio is 48.9 per cent whereas if you consider the approximate effective ratio under the assumption of 5 per cent unemployment being maintained, it is actually 153.4 and if the government achieved true full employment (2 per cent unemployment) it would fall to 133.4.
The greatest initial gain that can be made to reduce dependency ratios would be to restore true full employment.
The reason that mainstream economists believe the dependency ratio is important is typically based on false notions of the government constraint.
So a rising dependency ratio suggests that there will be a reduced tax base and hence an increasing fiscal crisis given that public spending is alleged to rise as the ratio rises as well.
So if the ratio of economically inactive rises compared to economically active, then the economically active will have to pay much higher taxes to support the increased spending. So an increasing dependency ratio is meant to blow the deficit out and lead to escalating debt.
All these claims should be rejected out of hand.
The Government is exhorting us to:
1. Work longer despite this being very biased against the lower-skilled workers who physically are unable to work hard into later life.
2. Increase our immigration levels to lower the age composition of the population and expand the tax base.
3. Cut back on the quality and quantity of the services that we have become used too because we can no longer afford them.
However, all of these remedies miss the overall point. It is not a financial crisis that beckons but a real one.
Are we really saying that there will not be enough real resources available to provide aged-care at an increasing level? That is never the statement made. The worry is always that public outlays will rise because more real resources will be required “in the public sector” than previously.
But as long as these real resources are available there will be no problem. In this context, the type of policy strategy that is being driven by these myths will probably undermine the future productivity and provision of real goods and services in the future.
It is clear that the goal should be, for example, to maintain efficient and effective medical care systems. Clearly the real health care system matters by which I mean the resources that are employed to deliver the health care services and the research that is done by universities and elsewhere to improve our future health prospects. So real facilities and real know how define the essence of an effective health care system.
Further, productivity growth comes from research and development and in Australia the private sector has an abysmal track record in this area. Typically they are parasites on the public research system which is concentrated in the universities and public research centres (for example, CSIRO).
For all practical purposes there is no real investment that can be made today that will remain useful 50 years from now apart from education and research.
Unfortunately, tackling the problems of the distant future in terms of current “monetary” considerations which have led to the conclusion that fiscal austerity is needed today to prepare us for the future will actually undermine our future.
The irony is that the pursuit of fiscal austerity leads governments to target public education almost universally as one of the first expenditures that are reduced.
Most importantly, maximising employment and output in each period is a necessary condition for long-term growth. The emphasis in mainstream integenerational debate that we have to lift labour force participation by older workers is sound but contrary to current government policies which reduces job opportunities for older male workers by refusing to deal with the rising unemployment.
Anything that has a positive impact on the dependency ratio is desirable and the best thing for that is ensuring that there is a job available for all those who desire to work.
Further encouraging increased casualisation and allowing underemployment to rise is not a sensible strategy for the future. The incentive to invest in one’s human capital is reduced if people expect to have part-time work opportunities increasingly made available to them.
But all these issues are really about political choices rather than government finances. The ability of government to provide necessary goods and services to the non-government sector, in particular, those goods that the private sector may under-provide is independent of government finance.
Any attempt to link the two via fiscal policy “discipline”, will not increase per capita GDP growth in the longer term.
The reality is that fiscal drag that accompanies such “discipline” reduces growth in aggregate demand and private disposable incomes, which can be measured by the foregone output that results.
Clearly surpluses help control inflation because they act as a deflationary force relying on sustained excess capacity and unemployment to keep prices under control. This type of fiscal “discipline” is also claimed to increase national savings but this equals reduced non-government savings, which arguably is the relevant measure to focus upon.
Lie # – The NCRIS funding scandal
The current conservative Australian government is also trying to deregulate the Higher Education system and allow universities to charge whatever fees they like to substitute for major Federal cuts to the system. The cuts will be very damaging and the differential fee system will increase student debts into the future.
The Senate (Federal upper house) has blocked the changes since last May (2014) and several members of on the cross bench that holds the balance of power have vowed to continue blocking the nonsensical legislation, which is ideologically-driven.
The Government has bundled key research funding in with these changes as a way of pressuring the Senate. The current Federal Education Minister is, in effect, blackmailing the Australian research community, of which I am part of, by saying that if the Senate blocks the deregulation, he will hold back more than $A150 million of research funding.
This article (December 15, 2014) – Science funding snarled by stalled education bill – provides background.
The National Collaborative Research Infrastructure Scheme (NCRIS) is the major infrastructure funding scheme supporting research in Australia. My own research group (CofFEE) is a significant beneficiary (and contributor) to a $A24 million grant under the NCRIS scheme, which will run out in June 2015 unless the forward funding promises are kept. Fortunately, I secured a different funding stream (Australian Research Council) last year which just kicked in and that allows me to preserve jobs in my centre.
Many other current projects will be defunded in the same way by the middle of this year and will be forced to shut down.
There are around estimated to be around 1500 researchers across many projects who will lose their jobs.
This research is a significant contributor to innovations and developments which will increase the productivity of the workforce in the coming decades and the material prosperity of the future generations.
It highlights the cant of the Government that they claim they are concerned about the future generations but are engaged in bloody-minded politicallly-motivated fiscal cuts now which will damage the prospects of the nation and its citizens in the future.
Lie # – The Australian Government issues debt even when there are surpluses
Regular readers will recall my account of the farce that the previous conservative government created in the early 2000s when it bowed to pressure from the investment banks and related financial market scammers to continue issuing government bonds even when they were running fiscal surpluses on the back of the massive rise in household debt.
In the Budget Paper No 1 for 2012-13, under Statement 7 entitled Future of the Commonwealth Government Securities Market, there was the statement:
In 2002-03, the Review of the Commonwealth Government Securities Market was undertaken in response to concerns about the future viability of the declining CGS market. Since this review, successive governments have committed to retaining a liquid and efficient CGS market to support the three- and ten-year Treasury Bond futures market, even in the absence of a budget financing requirement.
The term ‘budget financing requirement’ is highly misleading. It is not a financial requirement that is intrinsic to the monetary system. It is a voluntarily imposed rule that the government issue debt to match its deficit spending. The rule could be abandoned at any time without any change in the government’s capacity to spend resulting.
The 2002 Review was initiated by the Federal government. In effect, the Commonwealth government was retiring its net debt position as it ran surpluses and were pressured by the big financial market institutions (particularly the Sydney Futures Exchange) to continue issuing public debt despite the increasing surpluses.
At the time, the contradiction involved in this position (according to the Government’s own neo-liberal logic) was not evident in the debate although I did a lot of radio interviews trying to get the ridiculous nature of the discussion into the public arena.
The federal government was continually claiming that it was financially constrained and had to issue debt to ‘finance’ itself. But, given they were generating surpluses, then it was clear that according to this logic, the debt-issuance should have stopped.
While the logic is nonsense at the most elemental level, the Treasury bowed to pressure from the large financial institutions and in December 2002, Review to consider “the issues raised by the significant reduction in Commonwealth general government net debt for the viability of the Commonwealth Government Securities (CGS) market”.
I made a Submission (written with Warren Mosler) to that Review.
The Treasury’s (2002) Review Of The Commonwealth Government Securities Market, Discussion Paper claimed that purported CGS benefits include:
… assisting the pricing and referencing of financial products; facilitating management of financial risk; providing a long-term investment vehicle; assisting the implementation of monetary policy; providing a safe haven in times of financial instability; attracting foreign capital inflow; and promoting Australia as a global financial centre.
That is the logic noted above that during the GFC, the liquid and risk-free government bond market allowed many speculators to find a safe haven. Which means that the public bonds play a welfare role to the rich speculators.
The Sydney Futures Exchange Submission to the 2002 Enquiry considered these functions to be equivalent to public goods.
It was very interesting watching the nuances of the federal government at the time. On the one hand, it was caught up in its ideological obsession with “getting the debt monkey off our backs” – which was tantamount to destroying private wealth and the associated income streams and forcing the non-government sector to become increasingly indebted to maintain spending growth.
But it was also under pressure to maintain the corporate welfare. There was no public goods element to the offering of public debt. The argument from the financial institutions amounted to special pleading for sectional interests.
Private markets under-produce public goods. When economic activity provides benefits beyond the space defined by the immediate ‘private’ transaction, there is a prima facie case for collective provision. If CGS markets could be shown to produce public goods that enhance national interest, which cannot be produced in any other (more efficient) way, then this would be a strong, pro-CGS argument.
We argued in our submission that: (a) the benefits identified by Treasury which are used to justify the retention of the CGS market can be enjoyed without CGS issuance; and (b) more importantly, these benefits cannot be conceived as public goods, and rather, at best, appear to accrue to narrow special interests.
We also argued that:
They appear to be special pleading by an industry sector for public assistance in the form of risk-free CGS for investors as well as opportunities for trading profits, commissions, management fees, and consulting service and research fees.
Furthermore, and ironically, their arguments are inconsistent with rhetoric forthcoming from the same financial sector interests in general about the urgency for less government intervention, more privatisation (for example, Telstra), more welfare cutbacks, and the deregulation of markets in general, including various utilities and labour markets.
We justified this conclusion by closely examining futures markets, the superannuation markets and related issues. It should be understood that CGS are in fact government annuities.
The continued issuance of debt despite the Government running surpluses was really a form of corporate welfare – to provide safe investment vehicles to private investment banks.
We argued that with a flexible exchange rate, where monetary policy is freed from supporting the exchange rate, there is no reason for public debt issuance to private bond markets.
In this context the real policy issue was how well the Government was performing relative to the essential goal of full employment.
Our conclusion at the time, that the macroeconomic strategy had failed badly, also predicted the current crisis:
Despite the government rhetoric that the “strategy has contributed to Australia’s sound macroeconomic framework and continuing strong economic performance”, the recent economic growth has been in spite of the contractionary fiscal policy. Growth since 1996 has largely reflected increased private sector leveraging as private deficits have risen. Further, the recent ability of the Australian economy to partially withstand the world slowdown is due to the election-motivated reversal of the Government’s fiscal strategy, which generated the first deficit in 2001-02 since 1996-97.
A return to the pursuit of surpluses will ultimately be self-defeating. For all practical purposes any fiscal strategy ultimately results in a fiscal deficit as unsustainable private deficits unwind. But these deficits will be associated with a much weaker economy than would have been the case if appropriate levels of net government spending had have been maintained.
So the bottom line in this debate (which led to a Treasury Inquiry) was that the demand for continued public debt-issuance even though the federal government was running increasing surpluses appeared to be special pleading by an industry sector to lazy to develop its own low risk profit and too bloated on the guaranteed annuities forthcoming from the public debt.
Nothing much has changed in the 13 years since that Review. In the 2012-13 ‘Budget Paper No 1″, the Government clearly supported the retention of corporate welfare in the form of debt issuance.
… the Government consulted a panel of financial market participants and financial regulators on the future of the CGS market … The panel underlined the crucial role of a liquid, AAA-rated CGS market and associated futures market during the crisis and supported retaining liquidity in these markets as the primary objective for the CGS market in the future … Maintaining liquidity in the CGS market to support the three- and ten-year bond futures market will continue to be the Government’s primary objective, in particular as Australian banks prepare for the 2015 commencement of the Basel III liquidity requirements. In addition, the Government will: support liquidity in the Treasury Indexed Bond market by maintaining around 10 to 15 per cent of the size of the total CGS market in indexed securities; and continue to lengthen the CGS yield curve incrementally, in a manner consistent with prudent sovereign debt management and market demand … These objectives will mean that at some stage after the budget has returned to surplus, the Government will need to transition from reducing the level of CGS on issue to maintaining an appropriately sized CGS market … To ensure flexibility in implementing the Government’s objectives for maintaining a deep and liquid CGS market, and to meet the Government’s financing needs over the forward estimates, the Government will seek an amendment to the Commonwealth Inscribed Stock Act 1911 to increase the legislative limit on CGS issuance.
In other words, the Government is prepared to impose intergenerational debt burdens if it helps its mates in the financial markets.
Of course, that is using their own flawed logic.
Lie # – The previous Labor government’s spending was out of control
There was another story in the Fairfax media today (March 5, 2015) – Intergenerational Report to show Labor’s spending was growing out of control – which fails to educate the public.
Out of control has to be linked to some functional objective – and the most obvious objective that matters to people would be employment and income growth rates.
The Fairfax article (based on a preview of today’s Intergenerational Report release) claims that:
… the report will say that Labor’s commitments to hospitals, schools and the national disability insurance scheme would have lifted Commonwealth government spending to an unprecedented 37 per cent of GDP by 2055. It is presently 26 per cent, slightly above government revenue of 23.6 per cent.
The projections are what they are – guesses based on assumptions. The projections are typically very sensitive to the assumptions made.
But, moreover, even if all the projections are accurate the question is still begged. Is a ratio of federal spending of 37 per cent of GDP by 2055 a disaster?
How would we answer that question?
First, it relies on us taking a view about the desirable public-private mix in total GDP. An increasing public mix is neither good nor bad, per se. I think there is scope for more public activity and less private. But that is because I prefer public goods to private goods. There is nothing financially superior about any mix.
Second, it also depends on what will be the state of international trade, private saving and investment and the demands on public goods in 2055.
A higher fiscal deficit in 2055 than now suggests that the non-government sector will be saving more overall than at present. That could be desirable or not – it all depends.
Just quoting some fiscal figure and concluding that a larger deficit is bad and a surplus is good totally misses the point.
Further, the government spending aggregates built into the last Labor fiscal statement in 2013 were in the aftermath of a major fiscal stimulus associated with warding off the consequences of the GFC.
Real GDP growth was still below trend and the tax revenue associated with the downturn in the cycle was still subdued. Unemployment was still well above the level in February 2008 when the GFC began to hit Australia.
So just like in the US now, the fiscal deficit as a ratio of GDP would have fallen as the economy grew faster and more people became employed.
Claiming that the Labor government’s spending was out of control ignore the functional purpose of the increase in 2009 – to save the nation from a devastating economic downturn.
So it is a case of a deadly scam the Federal government is pulling in the Intergenerational Report exercise. There is no financial crisis. But because we are duped into believing that, we allow the government to hack into socio-economic programs.
That austerity will almost assuredly help create a real crisis in the years to come as our future workforce is less skilled and less experienced because of the unemployment and poor education that was inflicted on them now.
When I have had time to read the report in more detail I will comment about specific aspects.
But now I am rushing off to the airport.
That is enough for today!
(c) Copyright 2015 William Mitchell. All Rights Reserved.