Australian inflation rate stable at 2.4 per cent – solid case now for further cuts in the policy interest rate

The Australian Bureau of Statistics (ABS) released the latest – Consumer Price Index, Australia – for the March-quarter 2025 today (April 30, 2025). The data showed that the inflation rate rose by 0.9 points in the quarter but over the 12 months was stable at 2.4 per cent . The inflation rate has been within the RBA’s inflation targeting range for the last 9 months and inflationary expectations are all within the range. There are no significant wage pressures evident. Using the RBA’s own logic, its policy interest rate should now be cut.

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Majority of Australians want fiscal deficits to be maintained and the majority of younger Australians want to ditch capitalism

We are now full-swing into the national election campaign in Australia (election on May 3, 2025) and we have a new party – the Trumpet of Patriots – (funded by a property developer/miner) channelling Trump’s approach, the conservatives channelling Trump’s approach (although with a slight more subtle voice but not much), the Greens chasing their tails, and the Labor government desperately trying to stay in power after running scared of doing very much over the last three years. It is not a great choice. The usual scare tactics from the Opposition are out in force – immigration, defence vulnerabilities, etc and the usual ‘free market’ stuff. The Labor government keeps hammering on about their fiscal rectitude – two surpluses out of three – as if we are all mainstream economists who are obsessed with those irrelevancies. But it seems that the voters are not so aligned with mainstream economists.

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Australian fiscal statement – rising unemployment amidst a moderate fiscal contraction

Last night (March 25, 2025), the Australian government delivered the latest fiscal statement for 2025-26 (aka – The Budget – and, in doing so tried to win renewed electoral appeal given its waning popularity and a national election that has to be held in the next 6 or so weeks. So it offered the tax cuts and other inducements to the voters. But the underlying tenor of the fiscal position is unsustainable not because it is predicting on-going fiscal deficits out to 2028-29 but because those deficits will be too small relative to other trends that are likely to occur (external sector and household consumption spending). While the commentariat has been in conniptions about ‘eye watering red ink’ for a far as we can see (their eyes are poor), the fact is that the projected fiscal deficit is about the average level since 1970-71. But in the current environment, the forecasted government contraction will damage the economy and push unemployment up further than they are forecasting. Sure enough, the Government handed out some dollops of cost-of-living relief to low-income families – a few pennies in the scheme of things and that will probably help them retain votes. But with all the challenges ahead now is not the time to be in contractionary mode. Winning the election is one thing, but neglecting a host of existential matters in the medium term is not the way to go.

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Five years into a pandemic and fiscal fictions have left space for nonsense to propagate

Life expectancy has fallen since Covid in almost every country although the policy response has been exactly the opposite to what should be expected. We now have the United States Secretary of Health and Human Services advocating ‘personal choice’ in vaccine take up while he recommended Vitamin A to deal with a spreading measles outbreak in Texas. Decades of science is being disregarded in favour of ideology. We are now five years into the Covid pandemic and the data suggests that the costs of our disregard will accumulate over time as more people die, become permanently disabled and lose their capacity to work. We also know that the ‘costs’ of the pandemic have been (and will be) borne by the more disadvantaged citizens in the community. I was talking to a medical doctor the other day in a social environment and I learned something new – that in Australia, there is a difficult process that one has to go through to get access to the ‘free’ (on the National Health list) anti-viral drugs if one gets Covid. However, if you have $A1,000 handy, you can ring your GP up and get an instant prescription for the same drugs and avoid all the hassle, which has reduced access significantly for lower income households. Another example of how fiscal fiction (governments haven’t enough money) favour the high income cohorts.

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British government spending cuts will probably increase the fiscal deficit and make the ‘non negotiable’ fiscal rules impossible to achieve

The British press are reporting that the Government there is planning further spending cuts of the order of billions of pounds because the economic environment has changed and the current fiscal trajectory is threatening their self-imposed fiscal rules thresholds. We already heard last week how the Government is significantly cutting Overseas Aid as it ramps up military expenditure. Now, it is reported that billions will be cut from the welfare area and the justification being used is that there is widespread rorting of that system by welfare cheats. There are several points to make. First, getting rid of rorting is desirable. But I have seen no credible research that suggests such skiving is of a scale sufficient to justify cutting billions out of welfare outlays. Second, quite apart from that question, the micro attack on the welfare outlays have macroeconomic consequences. The British Office of Budget Responsibility estimates that the output gap is close to zero which means it is claiming there is full employment. Even if that is true, that state is underpinned by the current level of government spending (whether it is on cheats or not). If the spending cuts that are targetting rorting are not replaced by spending elsewhere then a recession will occur and the Government will surely fail to achieve its ‘non negotiable’ fiscal rule targets. It is a mess of their own making.

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Britain and its fiscal rule death wish

Governments that adhere to the mainstream macroeconomic mantras about fiscal rules and appeasing the amorphous financial markets have a habit of undermining their own political viability. As Australia approaches a federal election (by May 2025), the incumbent Labor government, which slaughtered the Conservative opposition in the last election, is now facing outright loss to a Trump-style Opposition leader if the latest polls are to be believed. That government has shed its political appeal as it pursued fiscal surpluses while the non-government sector, particularly the households, endured cost-of-living pressures, in no small part due to the relentless profit gouging from key corporations (energy, transport, retailing, etc). The government has not been riven with scandals or leadership instability. But its amazingly fast loss of voting support is down to its unwillingness to take on the gouging corporations and also to claim virtue in the fiscal surpluses, while the purchasing power loss among households has been significant. The same sort of death wish is arising now in the UK, although the British Labour government is at the other end of its electoral cycle which gives it some space to learn from its already mounting list of economic mistakes. The British government situation is more restrictive than the case of the Australian Labor government because the former has agreed to voluntarily constrain itself via an arbitrary fiscal rule.

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Germany’s sectoral decline and its obsession with fiscal austerity

I am currently researching statistical and textual material as part of my plan to produce an updated version of my 2015 book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale (published May 2015) – to take into account the pandemic, Brexit and other major changes that impact on Europe’s position in the world economy and the internal shifts within Europe itself that will make it even more difficult for the Member State nations to maintain their material living standards. My publisher (Edward Elgar) is keen to push this project on. As part of this work I have been examining changes since 2015 across various European states. Today, I discuss the decline in Germany’s fortunes that has arisen as a result of a combination of circumstances: an obsession with fiscal austerity; the suppression of domestic spending capacity; the unrelenting promotion of the so-called ‘export-reliant, manufacturing-heavy economic model’; the election of Donald Trump; and the maturing of the Chinese economy. German politicians, particularly, have become so caught up in the ‘Schwarze Null’ ideology that they have failed to anticipate the medium- and longer-term consequences of their actions. These consequences were all laid out in my 2015 book but policy makers have generally ignored any criticisms of the ‘German model’. Now the chickens are coming home to roost. Fast. And it spells bad times for Europe.

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Australian government announces a small shift in the fiscal deficit and it was if the sky was falling in

Yesterday (December 19, 2024), the Australian government published their so-called – Mid-Year Economic and Fiscal Outlook 2024-25 (MYEFO) – which basically provides an updated set of projections and statuses of the fiscal position six months after the major fiscal statement was released in May. One would have thought the sky was falling in given the press coverage in the last 24 hours. The standard of media commentary in Australia on fiscal matters is beyond the pail.

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RBA monetary policy decision defies logic

Well, as I write this late in the Kyoto afternoon, Donald Trump has just made a victory speech after an incredible day of election outcomes unfolding. As I wrote last week, the only moral and reasonable position for a progressive to take in this election would be to vote for Jill Stein and send a strong message to the two major candidates that they were totally unelectable. I reject the claim that that strategy would just deliver a victory for Trump. However, the Democrats can’t really deflect blame like that for their horrendous policies in relation to the Israel issue and more. So the US faced a Hobson’s choice and I hope progressive parties elsewhere heed the message of Harris’s loss. But today I want to write a bit about yesterday’s (November 5, 2024) decision by the Reserve Bank of Australia (RBA) to hold their cash rate target interest rate (the policy rate) constant. With inflation falling quickly, there is no logic to that decision. The RBA keep claiming that there is excess demand in the economy but that is an unsupportable claim given the evidence.

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These claimed essential fiscal rules in the UK seems to be disposable at the whim of the polity

Regular readers will know I have been a long-time critic of the fiscal rules that successive British governments have invoked as part of a pretence that they were being somehow responsible fiscal managers. The problem was that in trying to keep within these artificial thresholds, governments would do the exact opposite to what a responsible fiscal manager would do, which is preserve the integrity of public infrastructure, ensure public services reflected need, and steer the nation in a direction where it was able to meet the challenges that beset it. This period of ‘fiscal rule’ domination has been defined by relentless fiscal austerity and a degradation of living standards as successive governments pursued the neoliberal agendas. Now, it seems the British Labour government is finally realising that it cannot achieve its aims while retaining the fiscal rules they so tenaciously claimed were essential. Back when John McDonnell was the shadow chancellor I told him the rules were unachievable given his policy ambitions. His support crew – academics and apparatchiks vicariously slandered me for running that line. They were wrong and the current decision by the Chancellor to alter the rules proves that. But it also proves how ridiculous these rules are anyway.

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More misery and dysfunction coming for France – as the fiscal rules bite

For all those Europhile progressives who have held out that reform is the way to deal with the neoliberalism of the European Union and even, in some cases, claimed that the austerity mindset was over (once the fiscal rules enshrined in the Stability and Growth Pact were temporarily suspended during the pandemic), the behaviour of the French government should wake them out of their delusional reverie. The new Prime Minister addressed the National Assembly last week and outlined a new fiscal direction involving significant expenditure cuts and tax hikes. His plan will not satisfy the European Commission, however, who under the Excessive Deficit Protocol (EDP) have indicated they want a faster transition back to the fiscal rule thresholds (that is, even harsher austerity than Barnier is proposing). This policy shift is in the context of an elevated unemployment rate (which is rising) and an already significant output gap. The austerity is likely to push the unemployment rate towards 9 per cent (around) and will be a disaster for the prosperity of the French people who are still enduring the cost-of-living fallout from the pandemic and the Russian-Ukraine situation. Add in the possible impacts of the Middle East crisis and we have a failed state. Once again the fiscal rules defined within the EMU architecture are going to deliver shocking outcomes.

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More economists are now criticising the British government’s fiscal rules – including those who influenced their design

There is renewed debate in Britain at present on the use and design of the new government’s fiscal rules, which many people are now saying will force expenditure cuts which will “damage the ‘foundations of the economy”, according to the Financial Times article (September 16, 2024) – UK spending cuts would damage ‘foundations of the economy’, Reeves told. Those reported ‘telling’ Reeves include British economists, who were instrumental in the design of the rules that the new Chancellor has taken on and deemed necessary to rigidly control government spending. The economists claim that if Reeves continues to operate according to the fiscal rule “inherited by the Labour government” it will cut public investment expenditure significantly and undermine prosperity. I agree that the application of the ‘Fiscal Rules’ will be damaging but I find it amusing that some of the ‘Letter Writing Economists’ were prominent in advocating such rules in the past as the way ahead for British Labour are now criticising those rules.

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Some debriefing on continuous fiscal deficits and debt issuance

A government cannot run continuous fiscal deficits! Yes it can. How? You need to understand what a deficit is and how it arises to answer that. But isn’t a fiscal surplus the norm that governments should aspire to? Why frame the question that way? Why not inquire into and understand that it is all about context? What do you mean, context? The situation is obvious, if it runs deficits it has to fund itself with debt, and that becomes dangerous, doesn’t it? It doesn’t ‘fund’ itself with debt and to think that means you don’t understand elemental characteristics of the currency that the governments issues as a monopoly. These claims about continuous deficits and debt financing are made regularly at various levels in society – at the family dinner table, during elections, in the media, and almost everywhere else where we discuss governments. Perhaps they are not articulated with finesse but they are constantly being rehearsed and the responses I provided above to them are mostly not understood and that means policy choices are distorted and often the worst policy decisions are taken. So, while I have written extensively about these matters in the past, I think it is time for a refresh – and the motivation was a conversation I had yesterday about another conversation that I don’t care to disclose. But it told me that there is still a lot of work to be done to even get MMT onto the starting line.

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British GDP growth depends on the current fiscal position – a fact that is being forgotten

It seems that since they were elected British Labour, principally the Leader and Chancellor, have thought it necessary to put out ever increasing messages of doom and the need for tough fiscal action – aka austerity – despite them claiming when they were wooing the electorate that they would not pursue that ‘Tory’ option. Of course, they pulled the old stunt that once they were in office and had access to the ‘books’ they discovered, surprise surprise, that the state of government finances were even worse than they had imagined and that meant it was all to play for, which justified them taking tougher than planned actions. Every week passes since, it seems, when the tough talk gets tougher and core promises are abandoned. Tory policies that are the anathema of a progressive policy stance – such as the two-child benefit cap – will remain. And other Tory policies that were more ‘Labour like’ in nature will go – such as the Winter Fuel Payment received subsidy – will be severely cut back. There are many criticisms that I have made of the Chancellor’s stance (see previous blog posts) based on the absurdity of constructing the British government’s finances as equivalent in principle to the finances of a household issue. But, in addition to those more elemental issues, there is another matter that I have not seen addressed by the mainstream media nor the actual politicians relating to the proposed austerity. The whole discussion appears to be waged in a vacuum – context free. It is as if the current policy position, which the Chancellor claims is shocking and unsustainable, is divorced from the current broader economic reality in Britain. And that construction means that poor policy decisions will be made that will damage the material prosperity of the nation.

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Major macroeconomic policy reform is needed to reduce the reliance on monetary policy

There is some commentary emerging that is finally starting to question the reliance on monetary policy (setting interest rates) as the primary macroeconomic policy tool with fiscal policy forced into a passive role. In Australia, this debate has intensified in the last week following the hubris from the new Reserve Bank governor, who thinks her role is to sound like a ‘tough guy’ dishing out threats of ever increasing interest rate rises even as inflation falls. There was an Op Ed in the Sydney Morning Herald today (August 12, 2024) – Maybe only a recession will fix macroeconomic management – by the Economics Editor Ross Gittins, which challenges the current macroeconomic consensus. Some of this argument is acceptable. But when he advances his alternative proposal of “a new independent authority” to set monetary and fiscal policy, the reality is that this would be as bad as we have now. More on that later.

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The new British Labour government will have to abandon its fiscal rule or deliver very little

It’s the Wednesday pot-pourri – British politics, self promotion, events, sport and music. Politicians invariably claim that the situation they inherit when they take office following an election is untenable and that the ‘public finances’ are worse than they had initially thought. Of course, the idea that ‘public finances’ can be good or bad or somewhere in between is a misnomer and just reflects the ignorance of the fiscal capacity that governments have (that is, currency-issuing governments). There is no such thing as a deteriorating public finance situation. So when Rachel Reeves got up after being elected the new Chancellor of the UK she was just posturing and telling the British people that they should not expect much better than what the Tories delivered. What can be good or bad or somewhere in between is the state of public infrastructure and public services. And after 14 years of devastating Tory rule, one can safely conclude that there is a huge deficit in the UK in that context. The question then is what can be done about it. My reading of the situation is that if Labour want to actually improve things significantly in terms of public service provision and the viability of Britain’s infrastructure then it will have to abandon its mindless fiscal rule. And it would be better that they do that quicksmart while they enjoy such a large domination of the Parliament.

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ECB estimates suggest meeting current challenges will be impossible within fiscal rule space

In the recent issue of the ECB Economic Bulletin (issue 4/2024) there was an article – Longer-term challenges for fiscal policy in the euro area – which demonstrates why the common currency and its bevy of fiscal rules and restrictions is incapable of meeting the challenges that humanity and the natural world face in the coming years. The ECB article is very interesting because it pretty clearly articulates the important challenges facing the Member States and provides some rough estimates of what the fiscal implications will be if governments are to move quickly to deal with the threats posed. However, it is clear from the analysis and my own calculations that significant austerity will be required in areas of expenditure not related to these challenges. Given the current political environment in Europe, it is hard to see how such austerity can be imposed and maintained in areas that impact the daily lives of families. What is demonstrated is that the architecture of the EMU is ill-equipped to deal with the problems that Member States now face. The common currency and fiscal rules were never a good idea. But as the challenges mount it is obvious that Europe will have to change its monetary system approach in order to survive.

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British Labour Party once again tripping over their nonsensical fiscal rules

Regular readers will know that I am not enamoured with the British Labour Party leadership and its obsession with its so-called fiscal rule, which is really just a continuation of the rule that the Tory’s were supposedly running with. How can a self-styled progressive party (so-called) that is about to take over a nation that has been shattered by 14 years of the worst Tory rule that one can imagine, and which will require billions of pounds to be spent to even put a dent in the degradation in infrastructure, services, not to mention addressing the forward-looking challenges (health, climate, etc), claim that a fiscal rule that is biased towards austerity be appropriate? It beggars belief. By continuing with such rules, the Labour Party is ensuring that it will either fail to make much headway in redressing the damage and placing Britain in a better position to deal with the carbon challenges or will fail to meet the fiscal rules or both. It is recipe for not much. Pity the British people who have already endured the consequences of supporting, first Blair’s Labour, then the long hard years of the bumbling and incompetent Tories. In today’s post I want to highlight one aspect of the fiscal rule absurdity, and actually say that Nigel Farage is right about one thing, although not for the right reasons. Read on – a story of corporate welfare and fiscal fictions unfolds.

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Australia – GDP growth heads towards zero – then recession if there is no policy shift

Today (June 5, 2024), the Australian Bureau of Statistics released the latest – Australian National Accounts: National Income, Expenditure and Product, March 2024 – which shows that the Australian economy grew by just 0.1 per cent in the March-quarter 2024 and by 1.1 per cent over the 12 months (down from 1.5 per cent). If we extend the March result out over the year then GDP will grow by 0.4 per cent, well below the rate required to keep unemployment from rising. GDP per capita fell for the fifth consecutive quarter and was 1.3 per cent down over the year. This is a rough measure of how far material living standards have declined but if we factor the unequal distribution of income, which is getting worse, then the last 12 months have been very harsh for the bottom end of the distribution. Household consumption expenditure was stable but only because the saving ratio fell further. There is now a very real possibility that Australia will enter recession in the coming year unless there is a change of policy direction. Both fiscal and monetary policy are squeezing household expenditure and the contribution of direct government spending, while positive, will not be sufficient to fill the expanding non-government spending gap. At the current growth rate, unemployment will rise. And that will be a deliberate act from our policy makers.

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The fiscal lunancy reaches peak levels this time of year

In the last week, as the Federal government comes towards next Tuesday’s annual fiscal statement (aka ‘The Budget’ although we don’t use that terminology around here, do we?) and the State Government’s are progressively delivering their own Budget Statements (they being financially constrained) we have witnessed the absurdity of the system of public finances that pretends the Federal government is a big household and that somehow monetary policy is the most effective way to deal with an inflation that is sourced in supply side constraints. Earlier this week, the Victorian government released a fairly shocking fiscal statement, which cut expenditure programs in many key areas such as health care (while the pandemic is still killing many people), public education, essential public infrastructure maintenance and upgrades, and more. Why? Because it built up a rather large stock of debt during the early years of the pandemic and is now in political jeopardy because the state debt is being weaponised by the conservatives who claim the government is going broke. Similar austerity agendas are being pursued by other state and territory governments although Victoria leads the way because it provided more pandemic support to offset the damage that the extensive restrictions caused. Meanwhile, the federal government is boasting that it is heading towards its second consecutive surplus, as unemployment rises, hours of work fall, and the planet requires massive investment to attenuate climate change. The madness compounds when we realise that around 85 per cent of all state and federal debt that was issued between March 2020 and July 2022 was purchased by the Reserve Bank of Australia – that is, effectively, by the federal government itself. If citizens really understood the implications of that they would never agree to the swingeing cutbacks in public expenditure and the user pays tax hikes etc, that have been justified by an appeal to the debt build up. Its just madness.

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