I am still catching up after being away in the UK last week. I will…
Federal budget 2010-11 – a sad document
Tonight the Federal Treasurer delivered his third budget and it was a disappointing effort. The worst line in his speech was “Best of all, the unemployment rate is expected to fall further from 5.3 per cent today to 4¾ per cent by mid-2012, around the level consistent with full employment”. So their aspirations are that low. There was also nonsensical statements about the government not being able to afford to “invest in skills, infrastructure, renewable energy and hospitals” unless new tax measures were found. There is also some stupid fiscal rules introduced which will not stand scrutiny if Europe melts down and a new crisis emerges. The following is a 550-word Op Ed commentary I wrote for the local Fairfax press. The word limit and the audience constrain what I have to say and how I said it.
At the height of the last boom, Australia was still wasting 9 per cent of our available workers (either unemployed or underemployed). While labour lay idle and essential public infrastructure decayed, the government extolled the virtues of its surpluses.
Today, 12.5 per cent of our willing labour resources are idle and GDP growth is not strong enough to eliminate this waste. Retail sales data suggests that households are saving to reduce their debt exposure.
Export volumes are growing but with export prices down the mining boom will not be sufficient. Rising interest rates are also dampening growth.
The Australian economy while better off than most is still fragile and in need of fiscal support.
Last night, the Treasurer decided to withdraw that support more quickly than previously expected. His judgement is wrong.
The earlier than expected return to surplus will be seen by most as demonstrating fiscal responsibility. But in fact, it is just pandering to the financial markets, which caused the crisis in the first place and are now busily undermining living standards in Europe.
National accounting shows us that a government surplus has to equal a non-government deficit, the latter manifesting as rising private indebtedness. The Government’s surplus mania reinstates the dynamics that created the global crisis – a reliance on increasing private debt to maintain economic growth in the face of government contraction.
Alternatively, we endure slower growth than required to generate enough jobs for all, as the private sector continues to increase its savings ratio and the government contracts.
So far from being responsible, the austerity that the Treasurer announced will prolong the waste of our labour potential.
The early return to surplus reflects an unexpected boom in tax revenue.
First, tax revenue rises and falls with economic activity. Budget deficits rise in recessions but fall when growth resumes. These automatic effects render the usual deficit hysteria meaningless.
Second, the government has introduced two major new taxes – the $12 billion Resource Super Profits Tax (RSPT) and a 25 per cent increase in tobacco taxes.
It also represents the imposition of a rigid spending rule which is so inflexible that it will prove impossible to maintain and is unnecessary anyway.
Commentators are misrepresenting the RSPT as an investment killer. In fact, it is a partial impost on excess mining profits after all the costs including a competitive return are deducted. It provides some public return to the non-renewable assets that belong to all of us.
The so-called infrastructure fund is unnecessary. The government can and should be spending now to build new infrastructure to modernise our productive capacity.
Good points? The investment in more apprenticeships is excellent as is the increased funding for regional health and aged care services. Given the aged-care crisis in the Hunter these moves are welcome.
But the main “health” reforms are uncertain given the failure to reach agreement with the states.
With an election looming and the government looking vulnerable, some enticements might have been expected. But the “boring” budget reflects the current suspicion about the government’s track record on spending. They are instead hoping that the misperceptions they have peddled about the need to get the budget into surplus are believed.
Overall score: 4/10 – too much emphasis on the surplus and not enough emphasis on jobs and living standards.
Hi Bill,
A “very pleasent” article. However I am interested in your “real” opinion. It is obvious you mentioned a few MMT statements within the article ( I am sure the feedback will be “interesting” on them alone ).
Also interested to get your ideas of how exactly you think the ECB should have acted to “fix” Europe. It seems to me that the only MMT approach is to either change the rules to let the ECB buy country government issued debt or set the “dodgy” countries free to their own sovereign devices. I am however concerned what that would do given I assume their debtors would still be expecting payment in Euro not greek sawdust.
Love your blog.. MMT hurts my brain sometimes but it is the only theory that explains everything I see in the “real” world.
I still haven’t got my head around why sovereign governments don’t just constantly over-spend and manage the flow of the money in the private world via fiscal policy to control bubbles/constraints. This could however be because I haven’t got my head around the MMT model yet.
Thanks
Given that the public servants form the budget and most of them were there when Costello was treasurer nothing here surprises me.
Very few of these clowns have an economics background and those that do have very limited ones or obtained post grad qualifications at whatever ideological nuthouse the government of the day was subscribing to,
The NAIRU Boy Wayne Swan needs to leave the ring immediately.
I agree with most of what you’ve written here, but I think the RSPT as it currently stands is likely to be an investment killer. I agree that mining companies should pay a higher tax rate on their profits, but a rate of 40% ON TOP OF the existing corporation tax is too much.
And while the infrastructure fund is THEORETICALLY unnecessary, I think it’s quite important in practice. Governments, especially federal ones, have underspent on infrastructure for far too long. This will ensure that policy can’t go on.
Every Australian budget will always place an emphasis on surplus or a return to it. This cannot change until the public’s undertanding of how the modern economy actually functions changes. There was always going to be a return to surplus announcement because it would have been political suicide to do otherwise. Can you imagine this government or any government announcing that the budget would stay in deficit for ANY reason/s? Any government that does that is simply handing the next election gift-wrapped to the opposition as the public would swiftly punish the government for what they would overwhelmingly percieve to be “extreme incompetence”.
Only when the public has been educated enough to understand that the absolute last thing that the Australian government budget of today is, is a large version of a household budget – only then does the kind of economic approach that MMT proponents advance become a possibility.
As for the resource tax, I don’t think it’s over likely to be an investment killer. Here in Gladstone (a resource processing and exporting hub), the local rag has howled about the likelyhood of the huge LNG project slated to begin here being killed off but I don’t really buy it. Resources are lucrative in the extreme. No real economic growth is possible (they are REAL resources) without them and they are not evenly spread around the globe. They occur in isolated hotspots such as in Australia and many of the other hotspots are hotspots in the true sense of the word – tribal fighting, civil wars, unstable regimes. You cannot just pick up mining and take it elsewhere if you don’t like the tax regime.
Mining is covered by some of Australia’s most millitant unions. What would say, the CFMEU be doing right now if it thought it’s members jobs were going to be killed off or otherwise threatened? They would be screaming like banshees – but last I looked, they and the other mining unions were supportive of the tax. They clearly don’t believe their members jobs are at risk.
Off topic but …
IMO, mark thoma does not deserve to be called an economist after this “stuff” and from:
http://moneywatch.bnet.com/economic-news/blog/maximum-utility/congress-and-the-fed-why-the-bark-is-worse-than-the-bite/623/
The guy is economic and political hack, just like greenspan and bernanke.
I’m a bit confused about the underlying politics here. AUS has been running a surplus — so if we accept the household model at face value, then shouldn’t now be the time to “spend” that surplus? Why isn’t the public clamoring to open the warehouse and see where all of this money is? Or, are they saving the surplus for when the Australian government goes into retirement? What is exactly is the thinking and rhetoric on the part of the public?
Hi Bill,
Have been reading for a while but this “back to basics” column inspires me to ask a couple of questions about MMT.
1) You often make reference to national accounting identities of govt deficit = private surplus, etc, but this seems to me to leave out some complications:
a) Banks loan out money at interest greater than they pay on deposits. Doesn’t this imply that debts and surpluses will not sum to zero, because the debt in the system will be greater than the surplus?
b) The accounting identities approach seems to leave out the velocity multiplier, does it not apply in MMT? I suspect a response to MMT (if it was ever heard in the mainstream) would be that the large govt programs etc it would call for would reduce the scope of private enterprise, slowing the economy so that the new money was less effective than might have been expected?
2) accepting that government spending does not have to be limited to taxation + borrowing, are there alternative “hard” indices that could be used to (self)impose a limit on spending and avoid the risk/fear of galloping inflation? I’m not sure if unemployment is a good one, because I would think that unemployment would have diminishing returns to some extent, that is, once the immediately work-ready are back in the workforce it would cost more and more (with less and less return) to (re)educate, train, psychoanalyse, detox, etc the remaining unemployed – of course maybe this is worth doing anyway, but at what point does stimulating the economy enough to want to employ one more almost-unemployable person become too much new money?
I’m sure I’m revealing my ignorance of this or that in how I’ve phrased these questions. Please excuse.
RSJ,
The surplus has “been spent” already. When global panic erupted in late 2008, Rudd appeared before the nation, saying that Australia had spent years salting away money as insurance against economic crisis – “That time has now come” he said in the televised address to the nation.
The public basically believes that there was a big tin shed full of savings which the government spent on emergency economic stimuli. Now that growth has returned and the danger has passed (so we are told), it is only “prudent” that the government start shovelling any spare bills into that mythical tin shed again in order to accrue a surplus so that we can use it to deal with the next crisis, whenever it comes.
Plus there is a persistent meme in Australia that Labor party governments are “profligate spenders” and cannot help but keep spending up big, which we are constantly told requires increased taxation, crowds out private investment, causes inflation to run away etc etc.
So that’s the underlying political reality – a government simply determined portray itself as what public (wrongly) believes to be the correct model for good, responsable economic management (big government surpluses), in order to minimise the oppositions avenue’s for attack in the soon-to-begin federal election campaign.
Ahh, I missed the television appearance. Does the Australian government have a target retirement date, or is the target of the savings the next economic crisis?
I know how to save Australia! If the people want a tin shed of savings, the government can issue “savings vouchers” when it runs a surplus. These can be used to pay future taxes and will circulate. This decentralizes the surplus — smaller government — and allows people to have a record of their savings. When the government wants to spend the surplus, it can buy the vouchers back at market prices.
Do you see any conservative types opposing this?
And more seriously, this highlights why individual households should be able to hold claims against the government. I really believe that they should, in order to guarantee that they get a share of deficit spending on an individual level, regardless of the administration in charge. Those claims need not take the form of government bonds as we know them today — e.g. They could be issued based on need or pn a per capital basis, but individual households should be able to hold financial claims against the government to protect them across time and inflation.
JamesH,
No gold standard any more, no loanable funds, no fixed exchange rates, no government budget constraint, no NAIRU, and a whole host of other neo-liberal propaganda.
Unless you know of another supplier of $AUS other than the government / RBA I think Bill’s accounting identities are fine.
Your comments about the unemployed miss the main issue which is that there are not enough jobs or hours of work available to meet the demand of the unemployed and underemployed.
It’s a demand side issue not a supply-side issue.
cheers.
I was doing a bit of live-tweeting of the budget speech last night, and I think I picked up every point in this column. I guess I’m becoming a good soldier in the modern monetary army. This is a fantastic column, Bill, and I hope everyone reads the SMH and Age today.
Hearing Swan label 4.75% unemployment “consistent with full employment” made it perfectly clear that the workers’ party has totally abandoned the right to work. The modern monetary army needs to stand up and point out the neoliberal lies or unemployment and homelessness will continue to scar our society.
“Ahh, I missed the television appearance. Does the Australian government have a target retirement date, or is the target of the savings the next economic crisis?”
Hmm – not 100% sure about that RSJ.
The savings vouchers sounds like an interesting idea.
@lefty
the ‘savings vouchers’ are a joke, lefty. we already have them – they are called ‘dollars’ 🙂
Indeed a joke, but much of government is nothing more than black humor. I say run with it — what would be the conservative rejoinder to “privatizing the surplus”? And it need not be dollars per se. Instead of plastering them with aboriginal Koalas, or however you people paint money, we can have a large profile of Bill — they would be called “the Grinning Bills”, or “surplus Bills”.
@rsj
‘Treasury Bills’ even.
Alan,
I’m afraid that was a bit too cryptic for me.
Dear Simon at 11.43 pm
You said:
Normal Op Eds run between 550 words and 800 words. This one was 550. You cannot say much.
I think the Federal budget was a total disgrace.
Glad you have one to hurt! (-:
best wishes
bill
Dear Aidan at 12:25 am
You said:
If you understand the basis of the tax I think you would change your mind. Every corporation pays company taxes. But not every corporation has rights to exploit a non-renewable resource that belongs to all of us and then enjoys massive super-normal profits (rents) into the bargain.
By definition, if there are rents being enjoyed by the mining companies then they can be taxed without impacting on the resource allocation. The tax should be 100 per cent!
best wishes
bill
Dear RSJ at 1:14 pm
You said:
Australia was running surpluses from 1996-2007 (except one year). As the crisis hit the budget swung quickly back into deficit. But the later surpluses were accounting results and in fact, they pumped government spending into asset markets using the faux justification of building the Future Fund (to pay unfunded public service pension liabilities).
The public didn’t clamour to see where the “money” was because they haven’t a clue what the surpluses mean. They think they mean lower taxes.
best wishes
bill
Dear JamesH at 1:58 pm
You asked:
In fact, I say that government deficits have to equal the non-government surplus and vice versa. The private sector is not the non-government sector. You have to consider the external sector as part of the non-government sector.
The aggregate two-sector (government/non-government) analysis that is at the beginning of your journey into Modern Monetary Theory (MMT) clearly abstracts from some of the complications. But that doesn’t compromise the accounting at all. All the transactions you describe are have to sum to zero. Someone paying interest on a loan has the loan plus the interest as a liability while the bank has the outstanding loan and the interest income flow as the asset. They have to net to zero on both sides of the accounts.
Velocity is just the number of times the given money stock turns over in a period. What else do you want to say other than that? The important point that MMT considers is the balance between aggregate demand and the real capacity of the economy to respond to it.
You then said:
Unemployment is a lagging indicator and does not measure the full extent of capacity underutilisation.
Governments have to monitor a range of leading indicators to ensure they maintain balance between nominal demand and real capacity. The automatic stabilisers which deliver daily flows are good signals.
best wishes
bill
Dear Andos at 8:11 pm
T
Excellent and thanks for the kind words. The more people keep hammering that 4.75 per cent unemployment and 7.5 per cent underemployment definitely does not equal full employment the better.
best wishes
bill