Last Wednesday (November 22, 2023), the Tory government in Britain released their fiscal update known…
The Australian government is currently engaging the population in an agonising discussion about taxation reform and proposed spending cuts. It is almost vaudeville when the Treasurer, or the Opposition Shadow Treasurer or some business leader gets up and gives us their ‘two bob’s worth’ of nonsense. We have a “revenue problem”, “no we don’t, we have a revenue problem”, “we need to raise taxes”, “no we don’t we need to cut spending”. Then the government appoints a former investment banker as Treasury Department head and he starts raving on about how government should limit its spending to a maximum of 25 per cent of GDP without any argument being provided as to why that limit is meaningful, how it is derived, how it can be achieved if desirable, and all the rest of it. Sounds like a good idea. The Eurozone has destructive fiscal rules (Stability and Growth Pact) that we just whipped out of thin air and sounded important. We may as well, like dumb sheep, follow the race to the bottom. Meanwhile, real GDP growth falls further below trend and the disadvantaged workers endure elevated levels of unemployment and hardship. It is enough to drive one to drink. And then yesterday, the Australian Parliamentary Budget Office (PBO), which is one of those neo-liberal concoctions introduced by governments around the world to deflect responsibility for decisions from the politicians and frame the public debate in a particular way, published a new report (February 3, 2016) – National fiscal outlook – Report no. 01/2016. The mind boggles how people can write this stuff and go homeat night and take themselves seriously.
The PBO considers the fiscal situation as at the 2015-16 mid-year fiscal updates (which were provided in December 2015) and you get a clear idea of its ideological slant in the first sentence:
The national fiscal outlook has deteriorated significantly since the Commonwealth, state and territory governments delivered their 2015-16 budgets.
What exactly does “deteriorated significantly” mean in the context of a currency-issuing government such as Australia? Answer: not much.
It is language designed to inculcate in the public’s mind that when the fiscal deficit rises (gets larger) it is deteriorating, which means it is bad.
Alternatively, it indoctrinates the public into believing that when the fiscal balance moves towards or into surplus it is improving, which means it is a preferred option.
What if the fiscal deficit was 1 per cent of GDP and rose to 2 per cent of GDP as new large-scale public works programs stimulated employment and unemployment fell from 6 per cent to 5 per cent?
Would we consider that a deterioration that made any sense?
What if the fiscal deficit fell from 2 per cent of GDP to 1 per cent of GDP as government austerity impacted poorly on economic growth and unemployment rose from 5 per cent to 6 per cent?
Would we consider that an improvement that made any sense?
It is only when the discussion about fiscal statistics (spending and taxation) is conducted as a stand-alone exercise and deliberately divorced from any context relating to the real economy – production, employment, and unemployment.
Once we realise that the fiscal balance at any point in time is of no particular interest in itself, and must be interpreted in the context of what is happening in the real economy then ridiculous statements that the “national fiscal Outlook has deteriorated significantly” become transparent in their idiocy.
From the perspective of Modern Monetary Theory (MMT) perspective, national government finances can be neither strong nor weak but in fact merely reflect a ‘scorekeeping’ role.
And then you open the newspaper this morning and see that a Fairfax journalist has chosen to uncritically plagiarise the same ridiculous assessment.
We read in the journalist’s first paragraph that “The combined health of Australia’s federal and state budgets has deteriorated significantly since they were published last year.”
So the journalist adds the ‘sick person’ metaphor to the ideological slant that rising deficits represent a deterioration.
Among the other neo-liberal frames in the article:
2nd paragraph – “deterioration”.
3rd paragraph – “national fiscal deficit … is projected to deteriorate by $34.1 billion more than expected over the next four years”.
6th paragraph – “falling government revenues are mostly to blame for the multi-billion dollar blowout”.
8th paragraph “pushed the government’s fiscal balance further into the red”.
10th paragraph – “the fiscal balance of the Commonwealth budget is now projected to be $27.3 billion worse than expected …”
11th paragraph – “The remaining deterioration in the national fiscal balance ….”
12th paragraph – “It means Australia’s national fiscal deficit is projected to deteriorate by $34.1 billion more than expected …”
16th paragraph – “Shadow Treasurer Chris Bowen said Labor has supported more than $30 billion worth of improvements to the Budget bottom-line …”
And so it goes … Just a constant barrage of irrelevant terminology and ideologically-framed words.
Please read my blog – Framing Modern Monetary Theory – for more discussion on this point.
Okay – so after reading this type of article everybody goes back to their lives and takes with them the message of the article – the spurious conclusion – DEFICITS ARE BAD, RISING DEFICITS ARE WORSE, A NATION IS SICK WHEN THERE IS A RISING DEFICIT AND MEDICINE NEEDS TO BE INTRODUCED TO CUT THE DEFICIT.
They never really learn anything about what the concept of a fiscal balance is. The article contained zero critical analysis or educative material.
The article doesn’t differentiate between a rising deficit due to discretionary stimulus and a rising deficit due to a faltering economy, in part, as a result of prior attempts to cut discretionary net spending.
It contains no mention of the elevated unemployment, which is directly due to previous attempts by government to cut its deficit at a time when non-government spending could not support sufficient growth to reduce unemployment.
It doesn’t inform the reader that the rising deficit in this case is helping to put a floor in the declining real GDP growth rate through the function of the automatic stabilisers – in this case, declining tax revenue and rising welfare payments.
That is what passes for journalism in our national daily papers these days.
When Reports like this are issued 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.
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.
The fiscal balance can never be “sick”. It is not a patient that goes into deficit when a heart-attack is imminent. It can go into increasing deficit if there is insufficient net public spending in the economy because real activity falters (as it is at present in Australia) and the automatic stabilisers push out the balance.
That is not a sickness. It is just the scorekeeper telling the government that it needs to increase its net spending to push against the non-government spending cycle and stimulate real GDP. That is exactly the situation we are in at present in Australia.
Alternatively, if the government did take that responsible fiscal position (that is, deliberately increased its net spending to stimulate economic growth and employment), the rising deficit would signal and improving real economy, higher national income, increased well-being in the society as a result of reduced unemployment.
So in one sense, the rising fiscal deficit at present is a bad outcome but not for the reasons the PBO and the journalists would have us believe. It is a bad outcome because it means the government is neglecting to ensure that overall spending in the economy is at a level sufficient to ensure real GDP growth is capable of achieving full employment.
The deterioration is in the output and labour market consequences of the poorly framed fiscal policy. That is what needs to be focused on not the specific movement in the fiscal balance, up or down.
The PBO Report also provides little economic context preferring to conduct a self-contained exercise as if the fiscal numbers themselves mean anything much.
It is also highly misleading in other ways:
First, it calibrates the analysis in $A billions which always biases the reader into thinking ‘big’. In its graphs (see Figure 1-1, for example) there is no scale provided which would allow one to interpret the evolution of the $A billions deficit line in terms of the overall economy.
Not that the data can be interpreted without further context anyway, but our deficit in $A billions is minute compared to, say, the US government deficit. Given the PBO claim that our situation is sick, what would we say about the US situation?
Of course, the question is as ridiculous as the whole PBO approach.
At the very least, this sort of analysis has to be conducted with proper scaling which means we discuss things in proportion to the population (per capita), or, in this context, in proportion to GDP (per cent of GDP).
The following graph is a reasonably reliable depiction to the history of Federal government fiscal outcomes outcomes over the period 1953-54 to the present day. Please read the blog – Australian fiscal statement – attacks the weakest and will undermine prosperity overall – if you are curious as to how I compiled the dataset.
The columns show the Federal fiscal balance as a per cent of GDP (negative denoting deficits). The average deficit over the entire period was 0.9 per cent of GDP but if we take out the damaging surpluses between 1996-2007 the average becomes of 1.9 per cent of GDP, not much higher than it is now (around 2.3 per cent).
It is billions higher but when scaled to the size of the economy it is slightly higher than average and that is because real GDP growth is well below trend and the World has undergone a massive recession.
Second, it only provides graphs that begin with the fiscal year 2002-03 so as to grossly distort the historical context. I have written before about the abnormality of the period of fiscal surpluses between 1996 and 2007.
This recent blog – Listening to past Treasurers is a dangerous past-time – is my latest effort to get this message across.
The point is that fiscal deficits have been the norm over any of the successive economic cycles in Australia. There is no evidence that Australian governments ‘balance budgets’ over the cycle.
Refer back to the graph above.
On the rare occasions the fiscal balance 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.
There is no notion over this period that the fiscal 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 back to the 1930s then it would have just reinforced the reality that surpluses have been rare in our history.
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 as a result of an abnormal credit binge.
The international analogue of that credit binge created the pre-conditions for the financial collapse (GFC).
The only way the economy was able to grow relatively strongly during the period that the federal government was running those surpluses was because private spending, financed by increasing credit growth, was strong and pushed tax revenue up.
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.
The higher deficits in the recent period are 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.
We thus have to place the evolution of the fiscal balance into this historical and real economy context before we can make any sense of what is ‘good’ and what is ‘bad’.
Merely concluding that a rising deficit is sick or a deterioration is ignorant at best.
As an application of this nonsense, consider today’s news report from the national broadcaster the ABC (February 4, 2016) – Climate science on chopping block as CSIRO braces for shake-up.
This is an example of ideological agendas using other ideological agendas as cover. So the conservatives (and I have to say, the Labor Party in Opposition who are meant to be representing the workers) craft the deteriorating national fiscal outlook narrative and ram it home relentlessly until the majority of Australians believe it to be true.
They have no reason to form that belief other than the lies that they are fed by the elites aided and abetted by ignorant or lying economists.
So once that layer of myth is rammed down everyones’ throats, the climate change denialists enter the fray and claim, under the cover of the fiscal lies, that cut backs to our world-leading scientific research organisation have to be made – to improve the ‘efficiency’ of the organisation.
No guess where the cuts are focused – the climate science divisions – which lead the research into “measuring and monitoring climate change”.
The point is that if there is no data or insights then it is hard to make a case that climate change is upon us as a result of our own behaviour.
The current debate about tax structure and government spending in Australia promises to be an agonising and drawn out display of neo-liberal mythology supplemented by ignorant contributions from the media.
The PBO should be closed down if the government is looking to save money and the labour freed to pursue productive activities. At present, the staff are engaged in pumping out nonsense.
That is enough for today!
(c) Copyright 2016 William Mitchell. All Rights Reserved.