The fictional world of economics we blithely live in

This morning on the national radio, the Australian Treasurer was explaining to the nation the issues presented in the December – Mid-Year Economic and Fiscal Outlook (MYEFO) – which is a half-yearly review of the fiscal statement presented in the May each year (mostly) and was released to the public yesterday (December 16, 2019). I will get into some of the detail presently. But every statement that the Treasurer made, every sentence, was a classic example of fake knowledge being touted as verity. The interview lasted a few minutes and nothing the Treasurer said was correct. It is clear that we live in a fictional world where some of the most important influences on our lives are so misunderstood in reality yet ‘understood’ in this fictional world that the economists, the elites, the serving politicians, and us perpetuate. I have always been perplexed by the dichotomy between our human ingenuity in some areas and our dumbness and ignorance in other areas. And I clearly understand we cannot know everything. But on matters economics, if I survey people, I am astounded at how much they claim to ‘know’ – words such as Zimbabwe, hyperinflation, and the rest of the myths – come of their lips with ease as if they are knowledge. It is a quite extraordinary situation.

You can find the – Archive of Budgets – back to 1901-02 (the creation of the Commonwealth of Australia), if you want to trawl back in time and see how the narratives have changed until we are now so obsessed with attaining fiscal surpluses that we just deny the damage they do.

My commentary on this year’s fiscal statement – Australian government’s fiscal statement – pitiful and irresponsible election ploy (April 3, 2019).

The current context for my comments here is:

1. In the September-quarter, real GDP growth was only 0.4 per cent – signalling further weakness. The annual growth rate was 1.7 per cent, well below historical trend. Household consumption expenditure growth is moderating despite the July tax cuts and the saving ratio has risen sharply, signifying an unwillingness by households to continue to accumulate debt.

See – Australian growth outlook remains poor (December 4, 2019).

2. Australia’s labour market is weak with employment growth negative in November, a bias towards casualisation, and an unemployment rate stuck around 5.3 per cent and underemployment around 8.5 per cent.

The total labour underutilisation rate (unemployment plus underemployment) is 13.8 per cent and has been around 13.5 per cent for some years now. There were a total of 1,889.3 thousand workers either unemployed or underemployed and this number has been rising.

Australia’s participation rate is below the pre-GFC levels as is the Employment-to-Population ratio.

See – Australia labour market deteriorating – symbolises massive Federal government policy failure (November 14, 2019).

3. Wages growth continues at record low levels. Both private and public sector wages growth was just 0.5 per cent in the September-quarter – keeping growth at record lows.

Over the year to September 2019, overall wages growth was 2.2 per cent and in decline. With the annual inflation rate running at 1.7 per cent, workers were able to enjoy some real wages growth.

However, over the longer period, real wages growth is still running well behind the growth in GDP per hour (productivity), which has allowed profits to secure a substantially increased share of national income.

In the March-quarter 2016, the wage share was 55.2 per cent. By the June-quarter 2019, it had fallen to a low of 51.7 per cent.

See – Australia – wages growth continue at record low levels – further evidence of policy failure (November 18, 2019).

4. Australian households are carrying record levels of debt.

See – Reliance on household debt and a lazy corporate sector – a recipe for disaster (September 6, 2018).

5. The unemployment benefit payment has not adjusted in line with poverty line estimates for some years and recipients are being forced by both sides of politics to live well below the accepted poverty line.

See – Progressive’ groups in Australia captured by neoliberal ideology (September 18, 2018).

6. Inflation is persistently below the Reserve Bank’s lower targetting bound and shows no signs of increasing.

In that context, one should be surprised that the Government is still close to achieving a fiscal surplus, and I will explain how that is happening.

The Treasurer had a simple story to tell as yesterday’s revised data revealed that the Government was still aiming for a surplus, albeit a smaller one.

The following graph shows the estimated (projected) fiscal balance ($A billion) out to 2022-23 provided in the 2019-20 Fiscal Statement (aka ‘The Budget’) forecast, released in April 2019 (blue bars) and the updated estimated released in the MYEFO yesterday.

So the Treasury is now forecasting a smaller surplus across the forward estimates culminating in a surplus equivalent to 0.5 per cent of GDP in 2022-23.

These two graphs tell the story.

The first shows the annual growth in the Wage Price Index since the 2012-13 financial year (thick blue line). The dotted projected is based on the average over the last five years.

The other lines show the various projections published in successive fiscal statements (FS) and revised in the respective MYEFO’s over the period shown.

The government consistently has been wrong on how strong the labour market will be over its forward estimates.

And, income tax receipts in 2018-10 were $A333,449 million, while total tax receipts were $A438,579 million, meaning income taxes were 76 per cent of the total receipts and taxes on individual workers’ incomes dominate total income taxes.

So, these forecasting errors would normally push the fiscal balance away from surplus into increasing deficit.

Indeed, in yesterday’s MYEFO, the government has once again downgrades its total estimated tax receipts in 2019-20 by $A3 billion.

So, with such weakness in the domestic economy and wages growth well below the estimates that the Government used to forecast its surpluses, how come the Government is able to maintain confidence that it will generate a surplus in the coming financial year?

The answer is in the second graph, which shows the movement in iron ore prices ($US per tonne) (blue line) and the baseline forecast the government has used (red line) for the last several years ($US55 per tonne).

The Government could not anticipate the Vale iron ore mining company’s tailing dam disaster in Brazil, which forced its closure and caused a supply shortfall that led to spiralling iron ore prices.

This delivered record profits for iron ore miners in Australia.

As a result, Australia has recorded to two trade surpluses in a row – a rare event – and the Government’s company tax revenue has risen dramatically.

This is the reason that the fiscal position has still moved towards surplus even with the domestic economy in a parlous shape.

The point is that while the Government might try to claim that its economic management is sound as evidenced by how close it will come to surplus this financial year, the reality is exactly the opposite.

The factors that is within its influences – employment, domestic demand, wages growth etc – are all stagnating towards recession and the Government’s policy stance is responsible.

The factors outside their control – are keeping Australia from recession despite the Government’s own fiscal policy position undermining the economy.

The truth of the matter then is that the only way the Government will be able to get close to surplus this year is because of an unprecedented environmental disaster in Brazil that has seen the mining company executives imprisoned and an ongoing criminal investigation (Source).

Yet, the Treasurer continues to represent the fiscal position as a sign that the nation is “living within its means” and the Government is acting responsibly.

Here is the – Transcript – of the radio interview this morning with the Treasurer that I mentioned in the Introduction.

The Treasurer said:

1. “Well, we’ve seen a very strong labour market” – when there is 13.8 per cent of available labour resources not being used (either via unemployment or underemployment) then “very strong” is not the applicable descriptor.

2. “real minimum wages have gone up every year under us, whereas they went down three out of the six years that the Labor Party were in government, and what we’ve seen is again, a strong labour market.”

The minimum wage is set by an independent tribunal and the Government’s submission regularly argues for lower increases than have been awarded.

3. “you don’t want to underestimate the importance of the country now living within its means”.

Refer to point (1) again. We are wasting a massive amount of our available labour and incurring massive daily income losses in the millions as a result.

The relevance is that our ‘means” are the available productive resources that can be used productively and sustainably to generate output and incomes.

We are certainly living within our means as a nation in the sense that there are at least 1.8 million people who could be working who are not (in hours).

4. “The fact that we are able to deliver a surplus is very important because our interest bill on our debt was $19 billion last year, and that will reduce to $14.5 billion over the forward estimates, which frees up more money to be spent on schools, hospitals, infrastructure and other essential services that Australians need and rely upon.”

The interest bill is actually income flows to the non-government sector – us.

Thus, the Treasurer is celebrating cutting our income. Not something I would celebrate.

But, the causality is just a lie.

Sure enough, if the government says it can only ever spend $X and interest payments use up some of that $X then clearly the amount remaining for other things will increase if the interest payments fall.

But for a currency-issuing government there is no $X.

The net spending should be whatever it takes to ensure aggregate spending in the economy is sufficient to fund the overall saving desires of the non-government sector, and thereby maintain full employment.

It might be at full employment, there is a trade-off between components of government spending, should the government desire to increase one or more components.

That is because nominal spending growth should not outstrip the capacity of the productive sector to respond by producing real goods and services.

But Australia is no where reaching that limit yet.

5. “delivering a surplus is hard – that’s why no one has done it for the past 12 years – and we’re committed to doing it because it means that the country is living within its means.”

See point (3) again.

Living within a nation’s means is a real concept – defined in terms of available productive resources – and cannot be reduced to saying a surplus is good and a deficit is bad.

6. “One of the reasons why we were able to get through the GFC (global financial crisis) was because Howard and Costello paid off Labor’s debt and had the fiscal flexibility to spend through that cycle. So we need to create the buffers, we need to create the flexibility so that Australia can respond to future economic shocks when and whenever they occur.”

An outright lie.

The public debt ratio is irrelevant in determining whether a currency-issuing government can increase its net spending to redress a shortfall in non-government spending.

The Australian government can always increase its deficit and does not have ‘buffers’.

There is no sense that running surpluses create a ‘buffer’ of spending capacity. Surpluses are flows which disappear as soon as they are recorded.

They mean that the government spending injection is less than the spending drain via taxation.

They mean that the non-government sector is squeezed for liquidity and has to run down its net financial assets to meet the shortfall imposed by the
fiscal drag.

They mean that to maintain non-government spending growth, private debt has to rise, creating a more precarious, crisis prone situation.

They mean that the government is undermining growth.

There is no sense that the government ‘saves’ when it runs a fiscal surplus.

Saving is the act of foregoing consumption to increase future consumption possibilities and is applicable only to an entity that is financially-constrained.

The government can spend whenever it likes irrespective of whether it ran a surplus or a deficit last period. It does not store up spending capacity.

7. The Treasurer was asked by the ABC interviewer:

Q: Why should voters, though, care about how much the surplus is if they are worried about their wages growth or if they’re not getting enough hours at work, for example?

Treasurer: Well, just like your listeners pay down their mortgage over time, so too governments pay down their debt over time, and it has been, as I said, 12 years since we’ve last had a surplus, and that interest bill is dead money. It means it goes to bond holders, whether they are overseas or here in Australia, and it is money foregone – money that could otherwise be spent on important domestic initiatives and important essential services.

So the reason why we pay down the debt is to have the discipline to live within our means, but to ensure that future generations don’t have to pick up the tab for the last.

The household ‘budget’ fallacy.

The interest bill is not “dead money” – it is non-government income.

See point (4) on whether such income flows reduce the government’s capacity to spend on other things.

Future generations enjoy the benefits of infrastructure spending that provide services over many generations. They don’t endure any burden but enjoy the benefits.

Opposition response – pathetic is the word that comes to mind

Whoever is advising the Australian Labor Party on macroeconomics should be sacked immediately.

Here is a political party that lost the unloseable election in May 2019 against one of the worst conservative governments in our history after banging on about their goal to achieve an even bigger surplus despite the tanking economy and proposing to ‘pay for it’ by taxing retirees among others.

And they lost easily, with the government being returned with an increased majority to wreak havoc for another three years.

And they clearly learned nothing from that humiliation and betrayal of the working class.

They should have spent the first few years in opposition educating the public about why deficits are appropriate and why the goal of fiscal policy is not to achieve any particular ‘number’ but to ensure there is full employment after the non-government sector has made its spending and saving decisions.

Fast track to yesterday.

The economy is tanking, there are 13.8 per cent of available labour resources idle, household debt is at record levels and household consumption spending is stalling, etc etc.

What do they do?

Their finance spokesperson Katy Gallagher continued her ridiculous attack on the government for increasing public debt.

Her contribution to the public debate was:

The record and what you can see in the numbers, in the MYEFO today, is that net debt is up to $392 billion on their watch …

This is the seventh year, this is their budget, their MYEFOs, their updates they put out. Gross debt has more than doubled and is now at $556 billion. In this update, they have chucked away their promise on eliminating net debt in 29-30, that promise has gone.

No mention of unemployment.

No mention of anything that matters.

Just a reinforcement of the neoliberal myth about public debt.

The reality is that in a macroeconomic context, the exact statement is that the Government has more than doubled the wealth held by the non-government sector in the form of government bonds.

Is she saying that the Labor Party seeks to destroy that wealth and the income flows that arise from it?

Answer: she wouldn’t even understand the basis of the question.

In other words, she is, in my view, unelectable.

The same goes for the Shadow Treasurer Jim Chalmers, who blathered on about government failure for having to revise the surplus estimates downwards.

He called that “humiliating”.

Previously, he had claimed that Labor would only consider increasing the unemployment benefit, which successive governments have held, increasingly below the poverty line, if such an increase didn’t jeopardise their fiscal surplus ambitions.

He is unelectable.

So, for my British readers, you are not alone in having a hopeless situation where the progressive party is unable to cut through because it is receiving poor economic advice.

Conclusion

Such is life in Australia.

A moronic government only matched by a hopeless Opposition.

The point is that the fiscal surplus, if achieved, will only come about by accident – literally. It will have nothing to do with the good economic management of the Government.

That management is driving the domestic economy into the ground.

As soon as the supply response to the current shortage of iron ore is sorted out, the prices will decline dramatically and the lagging wages growth will then impact substantially on the Government’s forward estimates and a surplus will disappear.

Then the true causality relating government policy to economic destruction will be visible to all.

But not a word of that from the Opposition. They just raved on about higher public debt.

That is enough for today!

(c) Copyright 2019 William Mitchell. All Rights Reserved.