Classic deception from the Australian Treasurer

There is a pattern. Start with an aim which usually involves advancing the interests of some powerful lobby group. It is known that if the citizens realise that there is special pleading going on they will not be supportive. The solution – create some metaphorical language that will help convince us that the aim is worthwhile and legitimate. Then add a dose of ‘technical’ sounding language and some ‘scientific’ sounding concepts (for example, NAIRU), which ensures that only the metaphors, which have common parlance, resonate and the ‘detail’ is not challenged. Especially exploit the fact that most people are too embarrassed to question so-called ‘experts’ for fear of being humiliated for displaying ‘ignorance’. That is how fictional macroeconomics becomes mainstream and that is how we all become passive agents in spreading the fiction. The Australian Treasurer was at it again over the weekend after he had been rubbing shoulders with other Finance Ministers, Chancellors, and Treasurers in Washington D.C. at the annual IMF/World Bank meetings, which are akin to those evangelistic religious festivals where everyone is geedup – with a sense of self-importance and sanctimonious zeal.

The Treasurer wrote an Op Ed in the Australian national newspaper – The Australian (October 27, 2024) – I won’t link because it is behind a paywall) – entitled ‘Building economic buffers crucial in an unstable world’.

Here is a – Screen capture – of the article if you want to read it.

He said in his promotional Tweet that the article reflects his thoughts after talking to his “counterparts” in Washington:

The participants at these meetings talk among each other in the language of the Groupthink that binds them.

Questioning the legitimacy of the language and the concepts it conveys is never on the agenda, even in the face of a mass of logical and empirical evidence to the contrary.

The language is a code that they use to avoid scrutiny and becomes a self-reinforcing disciplinary measure in their dealings with the rest of us.

If challenged they invoke T.I.N.A. as if we were dumb enough not to recognise that obvious point.

The Treasurer’s Op Ed (see below for the full text) is an example of that sort of phenomenon.

I am ignoring the political content, which obviously is aiming to tout the bona fides of the Labor government in Australia.

First, we see the ‘fiscal policy’ is not involved claim:

Economies around the world slowed due to global uncertainty, higher interest rates and persistent inflation, with around three-quarters of OECD countries experiencing a negative quarter of growth in the past year.

In almost all the OECD countries that have endured slow or negative GDP growth, the trigger has been significant fiscal tightening, which in my view has been much more significant in shaping the trajectory of production and growth than the shifts in monetary policy over the same period.

There is no clear uniformity between GDP growth and monetary policy shifts, but there is a rather more clear pattern between the former and fiscal shifts.

The Treasurer then wanted to invoke fear by referring to the global geo-political state, including the military conflicts and, apparently, China’s real estate market.

There is this unstated assumption that if borrowers default on their housing loans in China, somehow that will cause a world recession.

The assumption is just asserted often by politicians but does not stand scrutiny.

The questions like How? Why? are never really answered.

The fact is that the Australian government can always mitigate any effects from the Chinese housing market whenever it wants by ensuring domestic demand remains strong (if growth is the objective).

But the international scene is introduced as an object of depoliticisation – as a source external to the domestic political scene that can be used to justify the T.I.N.A narrative.

Which is in the Treasurer’s words:

That’s why we’ve put a premium on responsible economic management, paying down billions of dollars of debt and building buffers against this global economic uncertainty while also investing in the future.

Our best buffer against global volatility is a responsible budget.

And so the theme became these ‘buffers’ and barely anyone in the media or anywhere else will actually get to the bottom of what that actually means.

The term is one of those ‘concepts’ that just pervade the public debate and which are never scrutinised.

The Treasurer provides some reinforcement to his claims:

A stronger budget is helping us build buffers against uncertainty. New data from the IMF shows that we’ve seen a big improvement.

… Australia is expected to be in the top three G20 countries in 2024 for budget balance as a share of GDP, up from 14th in 2021 under the Coalition.

He claims this is a “powerful demonstration of our responsible economic management”.

So the reader (and the voters) are led into the magical world of mainstream fictions.

1. “Stronger” is taken to mean fiscal surplus “weak” a deficit.

We are induced to relate strength to good and weak to bad.

2. “Stronger” also is taken to mean that the larger the surplus or distance away from deficit the better.

3. “Responsible” is taken to mean fiscal surplus irrespective of what else is happening in the economy and society.

4. “Buffers” are taken to mean fiscal surpluses and we are encouraged to believe that there is some storage of capacity that then follows the achievement of a surplus.

That storage is like insurance – insurance is good if there is risk.

So surpluses are strong, which is good, because they build storage capacity that protects us.

This is the language and rhetoric of the mainstream macroeconomic fiction.

Closer examination reveals that it is mindless nonsense.

And the fact that GDP growth in Australia is close to zero and unemployment is rising doesn’t come into the Treasurer’s evaluation process.

The fact that there is a massive shortage of affordable housing in Australia because of decades of under-investment by state and federal governments doesn’t come into it.

The fact that our health system is severely compromised and will collapse when the next pandemic arrives is ignored.

The fact that our university and training system is now so compromised is ignored.

And more.

The exercise the Treasurer plays involves delinking his discretionary policy choices from these things that for most of us determine our daily material standard of living.

His narrative narrows down the assessment process to ‘strong’ is ‘surplus’ is ‘good’ because it creates protective ‘buffers’ – end of matter.

So what are these ‘buffers’ that the Treasurer boasts about?

You might ask.

Fiscal aggregates – spending and revenue – are flows.

They are gone as soon as they occur.

They are not stocks that accumulate.

Buffers are stocks.

Primary commodity buffers, for example, are stores of wheat or wool or corn that are held in buildings and can be released when there are shortages.

We understand that clearly.

So I, for example, grow lots of food in the growing months, and then bottle the surpluses so that we have food in the winter months when some things don’t grow.

We reduce waste in the time of plenty and maintain continuity of supply in times of shortage.

That is what a buffer is – a stock to smooth out fluctuations in supply.

In the context of fiscal policy that concept makes no sense.

The Australian government can meet any spending need whenever it chooses, now, or in the future,

It issues the Australian currency and can never run short of it.

So a ‘buffer’ of dollars makes no sense.

Mainstream economists use a related narrative – that fiscal surpluses represent ‘national saving’.

That is equally nonsensical.

I save sometimes by depriving myself of consumption from my income so that I can build a ‘buffer’ of wealth (savings) which will accumulate and enable me to expand my future consumption possibilities given my income.

I have to do that if I want that expansion because my spending is financially constrained by my ability to attract ‘funding’ sources – income, prior saving, asset sales or borrowing.

That concept has no application to the Australian government or any government that issues the currency that is in use.

It does not have to ‘fund’ its spending and can spend as much as it chooses in the future regardless of what it has spent yesterday, or is spending today.

There is one caveat to that statement.

A ‘responsible’ fiscal manager ensures that all the available productive resources are being fully utilised and that usually requires the government to run fiscal deficits, given the desire of the non-government sector to save overall (and withdraw income earned from the spending stream).

Remember spending equals income and if some of that income is saved by one sector then next period’s income will decline unless there is a counter party (another sector) that is spending more than its income.

The point is that if a government has been running what I call a ‘responsible’ fiscal stance, then the capacity for extra spending in the next period is reduced simply because there will be full employment and any extra nominal spending growth would either introduce inflationary pressures or have to be offset with measures that reduce non-government spending.

So in that sense there is some ‘path dependence’ in fiscal policy.

But that path dependence does not arise because of financial constraints.

Rather it reflects the real resource situation in the economy and so our attention is redirected away from the nonsense that Treasurer writes about to questions of resource capacity and labour utilisation.

The Treasurer wants us to ignore those questions because it is inconvenient to his story of ‘responsible fiscal management’ to talk about the broad labour wastage rate in Australia which currently exceeds 10 per cent.

So where does all that leave the idea of ‘buffers’ in the fiscal context.

The Treasurer wrote:

In a little over two years in government … we’ve … delivered the first back-to-back surpluses in two decades, avoided $150bn of inherited debt, and saved tens of billions of dollars in interest costs.

So a ‘buffer’ apparently relates to lower outstanding public debt.

Which might be rewritten to reflect what that actually means.

‘For two years we have squeezed the liquidity in the non-government sector, which has caused unemployment to rise and GDP growth to head to zero or the negative.

That liquidity squeeze has forced the non-government sector to reduce its wealth holdings to meet the tax liabilities we have imposed on it.

And by forcing a reduction in the stock of private wealth, we have also destroyed one source of income that the non-government sector enjoyed.’

That is what has actually happened.

Now, I don’t want that to be taken as a sign that I support the issuing of government debt and the payment of interest to the non-government sector.

There are distributional issues that are involved – the interest payments tend to reinforce the income inequality because of the underlying wealth inequality.

But the above restatement of the Treasurer’s boasting is not understood by the public and if they did understand the consequences of fiscal surpluses in the current context they would certainly reject the conclusion that the government was acting responsibly.

That is the point.

The final point is to understand that it is meaningless to describe a ‘fiscal outcome’ as strong if it is in surplus and vice versa.

We can make no sense of fiscal positions by just measuring the fiscal position itself.

Sometimes a 2 per cent of GDP deficit is good and better than a 10 per cent deficit, but, other times the reverse would be true.

Sometimes a 2 per cent surplus is better than a 2 per cent deficit, but at other times the reverse.

The point is that context matters in relation to the purpose of fiscal policy.

That purpose is not to produce some financial outcome, given that the government does not actually have the capacity to deliver any particular targetted fiscal outcome.

Why?

Because the spending and saving decisions of the non-government sector ultimately determine the fiscal outcome.

If we spend less, then economic activity declines and tax revenue declines and welfare payments rise.

And vice versa.

The purpose of fiscal policy is to ensure there is sufficient spending in the economy to fully deploy all available productive resources.

We might add … in a sustainable way.

That shift in thinking diverts us away from thinking in ‘financial terms’ to thinking in well-being terms.

A deficit is responsible if it is necessary to maintain that well-being.

A fiscal position is irresponsible if it undermines well-being.

And if the non-government sector is desiring to save overall and is pursuing that strategy then it is likely the government will have to accept a deficit position or face recession.

Further, when the external sector is in deficit there is income produced that is diverted in net terms to the rest of the world and creating a domestic spending gap.

That alone requires a fiscal deficit unless the gap can be met by private domestic deficits, which are unsustainable because they require ever increasing levels of private indebtedness.

So a ‘strong’ fiscal position must be evaluated in the real resource context that prevails.