Scottish-born economist - Angus Deaton - recently published his new book - An Immigrant Economist…
After yesterday’s shock admission that our Federal Finance Minister Lindsay Tanner was losing sleep because he was worried about the Federal debt buildup, there he was on the ABCs 7.30 Report last night giving us more cause for concern that his sleeplessness is having a negative effect on his ability to conduct reasonable dialogue on economic matters.
The full transcript is testimony to his insomniac meanderings. Here is my take on the questions and answers in that segment. Once again I have just interposed myself on the segment.
KERRY O’BRIEN, PRESENTER: Lindsay Tanner, you said today that the Government’s debt position, after all its big stimulus spending, is like a person who earns $100,000 a year taking out a $5,000 loan. If that’s all it is, why are you losing sleep? I would have thought you could probably take out another $5,000.
LINDSAY TANNER, FINANCE MINISTER: … inevitably, there is a limit to any organisation, even the Federal Government with a very strong balance sheet as to how far it can go into debt and that’s something I’m very conscious of that.
PROFESSOR BILL MITCHELL, DIRECTOR, CENTRE OF FULL EMPLOYMENT AND EQUITY: A sovereign government (with a monopoly in currency issuance) never has to worry about solvency issues in its own currency. It doesn’t even have to issue debt if it is happy for short-term interest rates to fall to whatever support rate the central bank pays on excess overnight reserves in the banking system. There is no analogy between a person who earns x and takes out a smaller loan y. The Federal government does not have to finance its spending and can issue debt up until the markets decline to purchase any more of it.
KERRY O’BRIEN: But in the end … [FINANCE MINISTER] … you don’t really know what the ceiling is? Is that what you’re saying? What an acceptable ceiling for debt is.
LINDSAY TANNER: Well, I don’t think – yeah, exactly: I don’t think you can put numbers on these things because there are other factors in the economy that are moving round all of the time. So the key question about any debt level for anything is your ability to service the debt. And that relates to obviously interest rates and to your own revenues and these things of course are moving around all the time. So, it’s something that you have to have a sense of and there are other issues as well that we are very conscious of. But the key thing of course is how you get out of those budget deficits. So we’ve got a three point plan to move out of deficit as soon as normal growth is resumed and we’ve got through this current economic crisis: that’s about tax revenues reviving, it’s about not having new spending other than that’s offset by savings and it’s about restricting the growth in spending to two per cent in real terms. So we’ve got a trajectory out of deficit and a way of tackling the debt that is mounting, unfortunately.
PROFESSOR BILL MITCHELL, DIRECTOR, CENTRE OF FULL EMPLOYMENT AND EQUITY: There are no numbers you can put on that because any number one might dream up are irrelevant. The national government can always service debt in its own currency. That ability is not revenue-dependent as is claimed by the Finance Minister. The only issue is whether the level of government spending in any period (including interest payments on debt) is sufficient to “finance” the desire of the non-government sector to save (that is, sufficient to fill the spending gap left by private saving).
Any plan to move out of deficit would be a nonsensical and irresponsible act. The deficit should be an endogenous ex post artifact of private spending (and saving). The composition of the deficit should be a matter of choice – that is, to reflect the Government’s socio-economic program but ultimately the level of private spending relative to productive capacity should determine the size of the deficit, once the Government is satisfied with the relative sizes of the public and private sectors. The Finance Minister’s trajectories are neo-liberal constructs which will never work independent of what the private saving plans are. They are bound to reintroduce the same fiscal drag that got us into this mess.
[indicates I have edited the transcript here]
KERRY O’BRIEN: … … [FINANCE MINISTER] … you’ve already said a few weeks ago $115 billion has been lost in tax revenue, but all the news has been worse since then. Obviously, those tax revenues are going to be even bigger – the loss of those tax revenues is gonna be even bigger, as will be your deficit.
[indicates I have edited the transcript here]
LINDSAY TANNER: Yeah, but I don’t think that was a big secret a number of weeks ago. We had very bad growth numbers from China for example. We already knew that Japan was in deep recession, that Singapore was in deep recession, that Korea was in serious recession. So, it’s difficult to really tell to what extent if at all there’ll be a revision of these numbers in the Budget, and clearly it’s done at arm’s length from Government. It’s done by Treasury. And you’re right: the key figure there of course is the reduction in revenues – the end of the mining boom, the reduction in our tax revenues generally, that’s the key driver of moving into deficit and of course the debt burden that flows from that. But ultimately, of course, we’ve had to put in place stimulus packages to defend jobs and to support economic growth. That adds temporarily to the burden, but we’ve been very careful to make sure that that’s a temporary hit on the Budget, that it’s not a permanent hit.
PROFESSOR BILL MITCHELL, DIRECTOR, CENTRE OF FULL EMPLOYMENT AND EQUITY: The key driver to moving into deficit should have been the discretionary commitment by the Federal government to provide spending levels sufficient to fully employ the available workforce. At the height of the boom the labour underutilisation rate was still around 9.5 per cent (underemployment plus unemployment). This underutilisation reflected the fiscal delinquency which manifested as budget surpluses.
The admission by the Finance Minister that the budget has now gone into deficit initially because the automatic stabilisers are working as they should (loss of tax revenue and increase in welfare payments) means the deficit will not be as high a quality as it should. It would have been better if they came to power in November 2007 with a full employment plan which would have required the elimination of the obscene surpluses of the previous regime and would have signalled a forward-looking government. The budget is going into deficit now, in part, because they didn’t take leadership decisions back in 2007.
The Federal government should realise that the permament position will be deficit if the private sector desires to permanently save. The reality is that the surpluses were the temporary state – driving the private sector into increasing levels of debt (see earlier blogs) which were unsustainable.
[indicates I have edited the transcript here]
KERRY O’BRIEN: … [FINANCE MINISTER] … An International Monetary Fund paper has warned of a blowout in Australia’s future pension costs because retirees in this country, it argues, are more exposed to the crisis than most other countries because of their exposure to declining superannuation savings and the IMF says that the Government should immediately consider lifting the retirement age. Now there’s a political challenge.
LINDSAY TANNER: There’s no question that we’ve got a longer term challenge here about retirement incomes – that’s hardly a secret. And particularly given the increase in the proportion of people in the community of retirement age, it’s probably gonna start in the next year or two because of the ageing of the population. There’s many ways you can deal with that, but the key thing is ultimately improved productivity and improved participation in the workforce. They’re the issues that will determine how much we produce, what the overall level of living standards in the economy are and what our society as a whole can sustain in terms of retirement incomes. It’s also important to note that those superannuation problems are not permanent. Now we don’t know where the sharemarket will head.
PROFESSOR BILL MITCHELL, DIRECTOR, CENTRE OF FULL EMPLOYMENT AND EQUITY: The intergenerational nonsense hasn’t yet been put to bed. Lindsay would be better sleeping than rehearsing this tired nonsense. In earlier blogs I have covered this debate. Readers might like to read this paper we wrote on this issue. The only issues that changing demographics presents the government with are political. The Federal government will be able to purchase all the hip replacements that are demanded in the future should the politics allow them to do that. There is no financial reason that will stop them allocating increasing proportions of government spending to health care away. They will easily be able to convert primary school buildings into aged care facilities if needed. It might be that the generations that came after the baby boomers will demand more public spending on other things rather than help their ageing parents with new knees! But that will be a political issue not a financial issue. It is unlikely that there will be insufficient real resources (titanium etc) available for sale that hospitals will not be able to service the demand for health care.
But we have to separate the intergenerational nonsense from the very real decline in superannuation. Quite clearly the paper wealth that people built their retirement expectations has been significantly dented in the last 12-18 months. The net worth of households is now significantly lower as they struggle with record levels of indebtedness yet declining assets. This is all the more reason why the credit binge has to be over and that conditions have to return whereby the private sector can save and help boost their retirement possibilities.
And you know what that means? The Federal budget has to be in deficit more or less continuously to “finance” private savings and provide the public goods that will enhance our lives in retirement. We are back to that model and the sooner the Government realised that the easier things would be for all of us. There has to more collective goods in our lives and less private goods given the superannuation meltdown. Better public transport; better public entertainment; better public facilities. More sharing and less privatisation. Sharing infrastructure is typically a more efficient basis on which to allocate real resources anyway.
…. [some more came after this]
I just think someone should get Lindsay a nice book and a comfortable pillow and let him sleep this hangover off!