Mixed metaphors, same old fiscal myths

The ABC news report (May 4, 2015) – Budget figures likened to Stephen King novel as Deloitte predicts $14.1 billion blowout for 2015-2016 – is one of the worst pieces of journalism you will ever read. There is no critical scrutiny in this report at all. It clearly just takes the press release from the private consulting firm and summarises it for public consumption. That is not balanced reporting or good journalism. The ABC is our national broadcaster, funded from the public purse and reaches all the population. It is also a free resource so there are no barriers to entry to consumption. It therefore has a responsibility to provide balanced reporting and should never become partisan. The problem is that on economics matters it has become a neo-liberal mouthpiece and continually gives headline space to mainstream economics organisations who make money from selling spurious advice about the economy. The only reasonable thing that this ABC Report is that the headline likens the fiscal analysis of Deloitte Access Economics, a Canberra-based economic consultancy firm, to fictional prose, which I think is an accurate assessment.

The sort of stuff that Access Economics puts out is the equivalent of the propaganda that any totalitarian regime puts out. It assumes away all the important considerations and reinforces a simple message that goes to the heart of the population’s insecurities and ignorance.

The situation that the ABC report is covering is this (in Modern Monetary Theory (MMT) terms):

• Australia suffered a fall in private spending as a result of the GFC.
• GDP growth fell and unemployment rose.
• In 2008, the federal government introduced a major fiscal stimulus which saved the economy from recession and GDP growth returned quickly and unemployment started falling.
• China also introduced a major fiscal stimulus which saw a recovery in commodity prices and helped the Australian mining industry recover quickly
• Hysteria from conservative think tanks, politicians, business lobby groups, and consulting companies like Deloitte Access, reinforced and promoted by a captive neo-liberal media made it politically difficult for the government and they set about on an austerity campaign to get the fiscal balance back to surplus.
• It had previously been is surplus (10 out of 11 years between 1996 and 2007) only because the private household sector had run up record levels of debt which kept spending growth going at the same time as real wages were largely flat.
• The fiscal austerity imposed from 2012 duly undermined economic growth and unemployment started to rise again. Unemployment is now higher than it was in the worst months of the GFC period.
• Compounding the fiscal cutbacks, Australia’s terms of trade have fallen substantially as mining products are in oversupply (the famous cobweb cycle in operation) and that has further hit our national income. The investment associated with the capacity building phase of the mining boom is now over.
• The flat employment growth and falling national income has reduced the tax revenue that the government was expecting and as a result the fiscal deficit is now much higher than it anticipated. It was always going to be thus given the state of spending in the economy. It was a foolhardy exercise to pursue a fiscal surplus when private spending was so weak and labour underutilisation so high.
• The fiscal deficit is also higher because the Senate (our upper house) is not controlled by the government and refuses to pass austerity measures that were announced in the May 2014 fiscal statement because they consider them to be excessive and highly unfair.
• Overall, all that is happening is that the fiscal deficit is rising as the cycle turns down as it always does. Trying to cut net public spending further in this sort of climate will only exacerbate the problem.
• The problem is a lack of growth and rising unemployment – the fiscal balance just reflects that malaise. That, in itself is no problem and trying to make out that it is a horror story is disgraceful. The problem is the rising unemployment and increased poverty rates. That should be the headline.
• The solution is for the government to increase the discretionary fiscal deficit by increasing spending and/or cutting taxes. There is significant scope for increasing public spending on job creation programs, public health, education, infrastructure and environmental initiatives such as renewable energy.
• There is no fiscal emergency other than an urgent need for higher fiscal deficits to reduce the unemployment and underemployment.

Here is the history of the Australian Bureau of Statistics (ABS) broad labour underutilisation series (monthly) which adds together the unemployment rate and the underemployment rate. At August, the level was 14.6 per cent and when the data comes out later this week for the latest quarter, the rate will have risen – probably close to 15 per cent.

This is a very sluggish economy with a severely under-performing labour market. It is little wonder the fiscal deficit is rising.

You would learn none of that from reading the ABC commentary on the topic. The private consulting firm released its latest report on the fiscal situation. This firm has a track record: (a) of beating up fiscal deficits as bad; and (b) making huge forecast errors.

I guess when the national broadcaster gives them credibility with headlines and no critical scrutiny then it would be easy for people to be duped into believing this was valid information.

Further, even if the reports of the increase in the projected fiscal balance are accurate (and clearly the deficit is rising) the conclusions drawn and the language used to reinforce the messaging are totally erroneous.

The ABC reporting invokes many of the erroneous metaphors that seduce readers into believing that there is an emergency in relation to government fiscal policy.

1. “budget bust”.

2. “reckless and destructive approach to budget repair”.

3. “healthier budget times”.

4. “likened the 2015-16 deficit figure to the work of horror writer Stephen King and Norwegian artist Edvard Munch, who is internationally famous for his tortured artwork The Scream.”

5. “Deficit expected to be worse than predicted” – implying that a higher deficit is “worse” than a lower deficit.

6. “a $14.1 billion blowout”.

7. “That’s set to tear a hole in the budget”.

8. “At some stage spending needs to be cut [and] taxes need to go up to close this circle”.

9. “Budget repair at ‘snail’s pace'”

These metaphorical claims can join the list we published in our paper – Framing Modern Monetary Theory – and summarised by the following table.

These references to ‘holes’ and ‘busts’ and ‘blowouts’ and ‘horror stories’ invoke a sense of emergency and collapse and the references to repair suggests the fiscal balance is akin to a patient in a hospital that needs surgery or a car that is broken and needs fixing.

The intent is obvious – it serves the neo-liberal austerity agenda which is helping to redistribute real national income away from workers towards profits and increasing income and wealth inequality in our societies.

It is totally erroneous analysis when we realise that the national government issues its own currency and can never run out of money.

A trail of spurious forecasts and scaremongering

This is not the first time that the ABC and Access Economics have pulled this sort of scaremongering stunt. It is, in fact, a regular event.

The company in question hasn’t a great record in forecasting fiscal outcomes.

The ABC seems to give privileged access to the Director of Deloitte Access Economics, who is continually telling us about how bad deficits are, that the government is broke, that the deficit is broke and all the rest of it.

On November 5, 2012, the ABC news sprayed the following headline across the daily news – Access Economics forecasts budget deficit.

The only relevant news in this regard at that time was that Deloitte Access had changed their minds, which of-course the ABC didn’t choose to report.

On September 28, 2011, News Limited carried the story- Access Economics’ Budget forecast is pessimistic, says Wayne Swan. Wayne Swan was then the Labor Government’s Treasurer and also obsessed with achieving an ‘impossible’ fiscal surplus.

The News Limited report said:

Access expects a surplus of $3.8 billion in 2012/13 compared with Treasury’s forecast of $3.5 billion, but a $1.8 billion deficit in 2013/14 against an official prediction for a $4.5 billion surplus.

So they too had bought the surplus myth being propagated by the Federal Treasurer and a host of mainstream economists.

When the ABC confronted the Treasurer with the Access Economics Report that a small deficit was more realistic he rejected the claim and said:

Access Economics doesn’t always get it right …

Well, that is about the only thing the Treasurer got right during his period of tenure in that position.

By late 2011 (November), Deloitte Access were predicting a small deficit for 2012-13 (Source) and progressively altered their forecasts as each previous forecast looked to be an incompetent assessment.

The ABC continually ran interviews with the Deloitte Access Director where he talked about their “modelling” (they produce a regular subscription Budget report) but never once asked the most obvious question: If you are continually changing your forecasts yet nothing much has changed doesn’t this tell you that your “model” is deficient, at best?

Each update from Access was treated as if it was an insightful expert commentary on the state of affairs when in fact it was the speculative assessment of a group of neo-liberal economists who have an inadequate grasp of the operations of the macroeconomics of the nation, as evidenced by their appalling forecasting record.

In January 2013, I was invited to participate in the 2013 BusinessDay Survey which was run by the Fairfax Media (publishers of the Australian Financial Review, Sydney Morning Herald and the Melbourne Age, among other leading newspapers in Australia). You can find the make-up of the Survey panel and the forecast tables at – Peter Martin’s site – (he is the national economics correspondent for Fairfax).

At Peter’s site you will read that:

The BusinessDay economic survey uniquely incorporates the views of financial markets economists, academic economists and two working in industry groups – the Australian Industry Group and the Australian Workers Union.

Among the many aggregates that were up for prediction, we were asked to forecast in $A billions the fiscal deficit outcome for 2012-13. The following graph shows the range of forecasts produced at the start of the year by the panel of so-called experts.

I have added the November 2012 forecast by Deloitte Access Economics, which wasn’t on the Survey Panel.

The actual panel was divided between so-called market economists, academic economists, consultants and peak bodies but economists in only the first three categories provided forecasts.

The graph also includes the Average for the whole group (some of the panel declined to forecast this aggregate). I have also put the averages for the three (market, academic and consultants) categories in the graph and sorted the data in order of size of deficit predicted.

The 2012-13 budget deficit turned out to be $A18,834 billion. The red column ($A19.369 billion, which was the final estimate in the Fiscal papers – 6 weeks before the final figure was known).

My forecast was for a budget deficit in 2012-13 of $A20 billion, which was was clearly an outlier in the panel forecasts but as it turned out the most accurate.

You can see how poor the forecast from Deloitte Access Economics was.

When you see forecast errors that are so large then you have to wonder whether the forecaster (or their model) really understands what is going on out there.

How anyone could have predicted a surplus under the circumstances that prevailed at the time doesn’t bear thinking about. They really didn’t know what was going on or how the macroeconomy works.

Access Economics were at it again in 2014. When last year’s fiscal statement was brought down in May 2014, the ABC’s most-used economist (an ex Treasury official) who works for the Canberra-based consulting firm claimed on ABC radio that the proposed fiscal shift by the newly elected Conservative government 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”) was 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) were equivalent to 1 per cent and 1.1 per cent of GDP, 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).

A sharp slowdown in the economy followed that contraction and the fiscal balance was in deficit two years later (2001-02) – the only deficit that Conservative government 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.

Conclusion

Next week, the Treasurer will deliver the 2015-16 Fiscal Statement (aka ‘The Budget’). It is a period where the economic debate derails itself more profoundly than most periods.

The fiscal surplus obsessions, the mixed metaphors, all come out to play and the journalists reach fever pitch.

It is a very sad indictment on our educational system that such rubbish is interpreted as knowledge.

It will be a long few weeks.

That is enough for today!

(c) Copyright 2015 Bill Mitchell. All Rights Reserved.