Australian government fiscal outlook – irresponsible and will fail

Australia has been caught up in a almost national hysteria the last few days as the Federal government’s Mid-Year Economics and Fiscal Outlook (MYEFO) release approached. The MYEFO was released yesterday (December 15, 2015) and the sky is still firmly above us, albeit slightly overcast today with storms approaching. I can assure everyone the storms are meteorological events associated with the early summer rather than any moves by international credit rating agencies to detonate their heavy artillery and sink the continent into the Pacific and Indian oceans. The mainstream media coverage of the buildup to the MYEFO has been nothing short of extraordinary and demonstrates that no matter how wealthy a nation’s per capita, how educated it’s people appear to be, public debate is conducted at levels of ignorance that the cavemen and women would laugh at. I have spoken to several journalists in the last few days who by their questioning expose a basic lack of understanding of the macroeconomic implications of the data that has been released in the MYEFO. Basically, the Outlook shows that the federal fiscal deficit is larger than previously estimated (in the May 2015 Fiscal Statement aka ‘The Budget’) and this demonstrates the automatic stabilisers in operation to put a floor under the slowing economy. This counter-cyclical movement is something that we should be comforted by because as private spending contracts and the economy slows the expansion of the deficit limits, to some extent, the job losses and the number of businesses that might become insolvent. However, the mainstream reaction has been hysterical (as in hysteria) with all sorts of predictions about national insolvency, credit rating agencies downgrading us, and “deficits for as long as you can see”. The problem is that the so-called average Australian believes all this nonsense and doesn’t understand that the rising deficit is a good thing in the context of poor developments in private spending.

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Changing private investment activity requires higher fiscal deficits

I read an interesting paper this week from the US Federal Reserve Bank – The Corporate Saving Glut in the Aftermath of the Global Financial Crisis – written by Joseph Gruber and Steven Kamin. It was published in October 2015 as part of their International Finance Discussion Papers (Number 1150). Essentially, the paper documents a rather substantial “increase in the net lending … of non-financial corporations in the years preceding and especially following the Global Financial Crisis”. Their results cast doubt on the notion that the decline in productive investment over the last 15 years or so reflects a desire by firms to “strengthen their balance sheets”. These trends have significant implications for how we view fiscal positions and the normality or otherwise of particular deficit or surplus outcomes. The authors do not tease out those implications so I thought I would.

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European Commission forecasts – a denial of their only effective policy tool

In Greece, the national unemployment rate has been around (or higher) than 25 per cent since 2013 so it is little surprise that mortgage defaults has spiralled and people are selling of family heirlooms to wealth antique dealers in Switzerland to cover daily costs. A Geneva-based dealer told the Financial Times in June (Source) that “For buyers there are opportunities that only come along when there’s a real economic upheaval . . . in Greece it hasn’t happened since the second world war”. So the vultures are enriching themselves as a result of peoples’ misery. Its the market! No it isn’t. Its an incompetent government looking after themselves and allowing their citizens to go down the drain. Just yesterday, the Greeks have agreed to tougher foreclosure measures (as part of the bailouts) which will see impoverished Greeks lose their last vestige of dignity – their homes. And the latest European Commission – Autumn Economic Forecasts – (released November 5, 2015) portend a very sorry future for Greece and the Eurozone generally.

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With idle labour equal to 14.5 per cent, the fiscal deficit is too low

The fiscal position of a government that issues its own currency should never be a focus of attention other than to understand why it have evolved to its current level – whether it is reflecting mainly discretionary policy choices or cyclical effects (automatic stabilisers). If there was accelerating inflation and high GDP growth then one might be tempted to conclude the fiscal deficit is to expansionary and needs to be cut back. One might equally conclude that private spending is too strong and needs to be cut back. But when there is declining growth and very high and persistent labour underutilisation rates, it is hard to argue that the fiscal deficit needs to be cut. It is, in fact, lunacy!

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British government analysis shows fiscal stimulus effective in supporting growth

The British Office of National Statistics published the – Gross Domestic Product Preliminary Estimate, Quarter 3 2015 – yesterday (October 27, 2015) which showed, unsurprisingly, that the British economy is slowing and heading back into recession under current policy settings. The annual real GDP growth rate declined for the third successive quarter as the impacts of the world slowdown and domestic policy austerity start to take their toll. The British government really has to reflect back on 2012 and realise that with non-government spending weak and a household sector carrying very high levels of indebtedness, now is not the time to be trying to cut discretionary net public spending. There is a need for a public spending injection to restore growth while the world works out which way it is going to go.

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Australian labour market – in retreat on the back of poor macro policy settings

Today’s release of the – Labour Force data – for September 2015 by the Australian Bureau of Statistics shows that the Australian labour market went backwards this month after stalling last month. Employment growth was negative (drop of 5,100 thousand) and the participation rate fell by 0.2 points. The net result was that the labour force fell faster than employment and so unemployment fell by 8,100 thousand. The unemployment rate remained unchanged at 6.2 per cent. This is one of those times when falling unemployment is not a good signal. The unemployment rate would have risen to 6.3 per cent had not the participation declined. The teenage labour market went backwards again in September and their situation remains parlous. We are still waiting to see how much damage the the forecasted decline in private investment will bring. But with a weakening labour market and the Federal government intent on cutting its net spending over the next 12 months, the outlook looks rather depressing.

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Monetary policy didn’t work as intended

I read two articles (among others) on the flight over to Europe yesterday that are worth commenting on. The two articles discussed the role of monetary policy and, in particular, whether the policy changes to address the crisis had achieved their aims. I read these articles as I was doing some computations which would suggest that the main game in town remains fiscal policy. The first article was in the Wall Street Journal (October 4, 2015) – How the Fed Saved the Economy – written by former US Federal Reserve Chairman Ben Bernanke. He claims that the US is approaching full employment because of the ‘extraordinary’ policy innovations that the US Federal Reserve Bank introduced during his period as Chairman. The second article was in the New York Times and argued that monetary policy authorities do not have the necessary policy tools to combat the next crisis. The NYTs article captures the ideological bias that entered policy discussions since the emergence of Monetarism in the 1970s. It makes out that policy is powerless, which is largely only a statement about monetary policy. It is a reflection of how perceptions of what we think monetary policy can achieve are way out of line with reality. But that is core Modern Monetary Theory (MMT). But that doesn’t mean that policy overall is powerless. Governments can always prevent a financial crisis and a recession from occurring if they are willing to use their fiscal capacities. Of course, that capacity is the anathema to the neo-liberals which is really the problem. There is no policy powerlessness. Just an ideological bias against using the available tools properly and responsibly.

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Canada – by hook or by crook there will fiscal deficits

The December 2014 – Financial System Review – published by the Bank of Canada presents some chilling data, which tells me that the Canadian government’s embrace of neo-liberal orthodoxy is taking the nation down a dangerous path. The Review was obviously written before the latest global growth trends became apparent to the likes of the IMF who have now finally worked out that the policy structures in place which emphasise internal devaluation and fiscal austerity in most places are killing off growth. Canada is now very exposed because of its policy failures. The problem is that the political class in Canada is obsessed with recording fiscal surpluses and seem unable to understand that the only reason it has been able to reduce the fiscal deficit in the post-GFC period is because the economy has experienced a resources boom which is now over and the household sector incurred unsustainable levels of debt. Both sources of spending growth are now unlikely to continue and business investment is now contracting as the opportunities in the resources sector diminish. The Government and the main opposition party are heading into the national election boasting that each will achieve a fiscal surplus in the coming year. That is now unlikely because the downturn in the economic cycle (Canada is now in recession) will work against the aspirations of the politicians. They will end up with a fiscal deficit whether they like it or not. If they take the (stupid) neo-liberal path and fight against the private spending cycle, Canada will end up with what I call a ‘bad’ deficit driven by the automatic stabilisers – a rising deficit with rising unemployment and declining growth. Alternatively, it can take the sensible path and introduce new discretionary spending programs to allow a ‘good’ deficit to emerge where the public spending supports the moderation in private spending and unemployment does not rise. That is the preferred path but I doubt that either major party in Canada is mature enough and educated enough to take that action.

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Jeremy Corbyn’s ‘New Politics’ must not include lying about fiscal deficits

One cannot but be very happy that Jeremy Corbyn has assumed leadership of the British Labour Party if you sit on the progressive side of politics. His elevation to the top job has all but closed the door on the compromised years of New Labour. The so-called Blair-ites have been declared yesterday’s new and not before time. Their embrace of neo-liberalism and the ‘light touch’ approach to the financial sector allowed the destructive period set in place by Margaret Thatcher in the 1980s to become more intense (for example, the decline of manufacturing and the increasing dominance of the unproductive financial sector). But as I have indicated before, some of the language and promises coming out of the Corbyn camp appear to be within the neo-liberal paradigm and, in many ways, not an advance on the New Labour shemozzle. I know that the claim will be that they have to be cautious for political reasons not to open themselves to attacks from the conservatives given the public fear of fiscal deficits, after years of indoctrination. But then their claims to be heralding in a ‘new politics’ would seem to be rather lame if they are prepared to lie or obfuscate about the role and meaning of fiscal deficits just to get some political advantage. Further, at some point they will have to take this issue on if they want to forge a truly progressive new political agenda. Otherwise, they will wallow in the confused space where they cannot break out of the neo-liberal mould while banging on about how fair they will be. They have five years before the next election – and that is plenty of time to reeducate the public. That process of messaging and re-framing should start now. Accordingly, they should take the political flack now and trust in their messaging and re-framing.

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Australia’s crawling Internet speed signifies wider fiscal failure

One of the small things I noticed (and enjoyed) in Europe in the last few weeks is the speed of the Internet connections available. Even if one takes the so-called ‘low speed’ option at the hotel (invariably free), the connectivity speeds were far superior to anything I have available in Australia. That matters when large datasets are involved. We often wait minutes for datasets to download here from say the Australian Bureau of Statistics. Watching streaming video is often a case of getting it started, pausing it, and waiting an hour or more for the download to occur so that you can watch it without interruption. Australia is very backward in this regard and the reasons that we are set to become even more disadvantaged are the same reasons that the economy are heading towards recession – a neo-liberal fetish against government spending and an ideological blindness to innovation.

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Australian coal sector being undermined by responsible Chinese policy

Earlier this week, the US National Oceanic and Atmospheric Administration published its – Global Summary Information – June 2015 – which reported that in the period January to June 2015, the globally-averaged land and sea surface temperatures were the highest for those months since the data was first collected in 1880 (135 years). I am not a climate change expert but the array of data that I have looked at from a statistical perspective tells me that what the experts are saying with respect to global warming and climate change is probably correct – it is happening and it is happening relatively quickly. The conservative Australian government remains in denial of the global trends with respect to climate change. It is introduced various policies that have made us a national disgrace – such as, abandoning the mining and cut taxes introduced by the previous government, defunding a research institute set up to provide information about climate change, and instructing a public ‘Green Bank’ to not fund wind or solar projects. This week, the government has been castigated by a British Tory MP, who said that its approach to climate change was not that of a ‘conservative government’ and bordered on delusion. But the most important piece of data this week has been the latest figures from China that show that dramatic restructuring away from coal consumption is rapidly taking place which will undermine the viability of the Australian coal sector in the coming decade. So the ‘market’ is going to force change in Australia when it would be much better for government to plan an orderly transition away from coal.

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Why investment expenditure is insensitive to monetary policy

The June quarter 2015 edition of the Reserve Bank of Australia Bulletin has an interesting article – Firms’ Investment Decisions and Interest Rates – which further erodes the mainstream economics claim that business investment is negatively related to interest rates in any continuous way. The implications of the RBA research are many. First, it further helps us understand why monetary policy (adjusting interest rates) is not a very effective way of managing aggregate spending. Second, the research undermines the validity of the mainstream claims that crowding out of private expenditure occurs when government spending rises. The paper finds that investment decisions by firms is not sensitive to interest rate variations within certain ranges. Third, it demonstrates that business investment is driven significantly by subjective sentiment rather than being an exact process driven by quantifiable metrics.

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Seeking zero fiscal deficits is not a progressive endeavour

There was a most extraordinary Opinion piece in the British paper The Independent last weekend (June 13, 2015) – Labour should have managed the economy better when in power. It was written by the aspiring Labour spokesperson on business, innovation and skills, one Chuka Umunna, who in the days following their electoral loss advanced his name for leadership. His outlook, inasmuch at it represents where the British Labour Party is heading will render them irrelevant for years to to come (the Tories do this stuff better) and is almost indistinguishable from the growth strategy advanced by the Conservative Australian government in its most recent fiscal statement – more private debt driven by fiscal surpluses. We have been there before – it turned ugly as it always was going too. It is quite clear that comprehension of basic macroeconomics is light on the ground when it comes to Umunna and his ilk. A very sorry state.

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Friday lay day – Australian RBA Governor concludes government policy is failing

Its my Friday lay day blog and today a brief discussion about property price bubbles and how the Reserve Bank of Australia (our central bank) has fallen out with the Australian government. This week, the simmering tension between the Governor of the RBA and the Conservative Australian government more or less came out into the open when the Governor told the nation that the fiscal strategy of the Government was failing and a higher deficit was required given the circumstances. The RBA Governor has also come clean on the issue of house prices in Australia which he said he was “acutely concerned” about and called them “crazy” again, a direct contradiction of the claims by the Government that there is no problem and people should just “get a better paying job” if they wanted to buy a home. It is rare for a central banker to be so pointed about the failure of Government policy.

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The myopia of fiscal austerity

When I was studying in the UK during the dark Thatcher years there was a rat plague in Manchester. The reason was traced to the public spending cuts that had led to the reduction in rat catchers/baiters who had worked on the canals that go through Manchester. Later that year (December 1982), there were widespread collapses in the Manchester underground sewers which caused effluent in the streets, traffic chaos and long-term street closures. Major inner city roads were closed for a good 6 months while repairs were rendered. The reason – cut backs in maintenance budgets. The repairs ended up costing much more than the on-going maintenance bills. That experience brought hometo me the myopia of austerity. While the austerity causes massive short-term damage, it is clear that it also generates a need for higher public outlays in the future as a response to repairing or attending to the short-run costs. The latest focus in Britain is on rising waiting lists in hospitals and increasing violence in prisons. All these examples of austerity compound and reverberate throughout society in countless little ways that accumulate to one huge mess. The Thatcher years were highly destructive for the well being of the British people contrary to the myths that the conservatives pump out. The current period will be of a similar ilk. And spare a thought for the long-term damage in places like Greece! It is beyond belief.

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Fiscal stimulus does not necessarily mean large government

There was an interesting if not ego-centric interchange last week involving the New Keynesian economist Paul Krugman and others about whether the sort of macroeconomic policy positions one takes is more motivated by ideological motives (about the desirable size of government) rather than being evidence-based. Apparently, if you support austerity it is because you really just want smaller government and vice versa. This is an oft-stated claim made by conservatives. That if you support fiscal stimulus and government regulation that you are automatically in favour of big (intrusive) government. The point is not valid. Whether one supports a larger proportional government or smaller is a separate matter to understanding how the monetary system functions and the capacities and options available to the government. Modern Monetary Theory (MMT) provides the basis for that understanding but not a prescription for a particular size of government.

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The ‘fiscal space’ charade – IMF becomes Moody’s advertising agency

The IMF has taken to advertising for the ratings agency Moody’s. It is a good pair really. Moody’s is a disgraced ratings agency and the IMF has blood on its hands for its role in less developed nations and for its incompetence in estimating the impacts of austerity in Europe. Neither has produced research or policy proposals that can be said to advance the well-being of nations. Moody’s has shown a proclivity to deceptive behaviour in pursuit of its own advancement (private largesse). The IMF struts around the world bullying nations and partnering with other institutions to wreak havoc on the prosperity of citizens. Its role in the Troika is demonstrative. Anyway, they are now back in the fiscal space game – announcing that various nations have no alternative but to impose harsh austerity because the private bond markets will no longer fund them. They include Japan in that category. Their models would have drawn the same conclusion about Japan two decades ago. It is amazing that any national government continues to fund the IMF. It should be disbanded.

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Australian fiscal statement 2015-16 – cynical and venal

Last night, the Australian Federal Treasurer brought down his second ‘fiscal statement’ (aka, the Federal ‘Budget’). I try to avoid the term ‘budget’ when discussing national government fiscal balances because it leads to a confusion between a the finances of a household, which uses the currency and is financially constrained and the finances of a sovereign government, which is never revenue constrained because it is the monopoly issuer of the currency. In last night’s fiscal statement, the Treasurer committed the Government to a policy path that will entrench mass unemployment (over 6 per cent for the next three years and not much below that in 2018-19). In each of the next four years, the fiscal shift is contractionary despite claims that it is a ‘big-spending budget’. It has nothing much to do with economics and all to do with the dramatic failure of last year’s fiscal strategy and the resulting plunge in electoral support. With an election next year, the Federal government has tried to run a fiscal policy with headline appeal but the reality is that the outcomes will continue to undermine the well-being of the disadvantaged. It will also fail to achieve its own fiscal targets because the in-built growth assumptions are too optimistic. Finally, it exposes the lie that the Government peddled in the lead up to the last election that on-going deficits would cripple the economy and send the nation bust. In that sense, the government is looking like the Tories in Britain in 2012 when they cut short the ridiculous austerity push which had sent the economy back into recession and instead allowed for an on-going deficit. The deficit wasn’t nearly large enough and so growth there has been pitiful. But it was large enough to support some growth. The same will be the case in Australia.

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Australian labour market – contracts again, policy settings wrong

Today’s release of the – Labour Force data – for April 2015 by the Australian Bureau of Statistics shows that the Australian labour market has contracted again, repeating the pattern over the last 24 months or so where employment growth zig-zags around the zero line and is weak at best. Full-time employment growth was sharply negative this month. Unemployment rose as a result as did the unemployment rate, but the latter would have been higher than 6.2 per cent had not the participation rate fell by 0.1 percentage points. The teenage labour market went backwards again and remains in a parlous state and requires an urgent policy problem that the Federal government refuses to recognise or deal with. In general, there remains a need for more job creation stimulated by an increased federal government deficit. Next week’s fiscal statement, widely tipped to include further cuts in net government spending, will demonstrate how incompetent and out of touch the federal government in Australia is.

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Mixed metaphors, same old fiscal myths

The ABC news report (May 4, 2015) – Budget figures likened to Stephen King novel as Deloitte predicts $14.1 billion blowout for 2015-2016 – is one of the worst pieces of journalism you will ever read. There is no critical scrutiny in this report at all. It clearly just takes the press release from the private consulting firm and summarises it for public consumption. That is not balanced reporting or good journalism. The ABC is our national broadcaster, funded from the public purse and reaches all the population. It is also a free resource so there are no barriers to entry to consumption. It therefore has a responsibility to provide balanced reporting and should never become partisan. The problem is that on economics matters it has become a neo-liberal mouthpiece and continually gives headline space to mainstream economics organisations who make money from selling spurious advice about the economy. The only reasonable thing that this ABC Report is that the headline likens the fiscal analysis of Deloitte Access Economics, a Canberra-based economic consultancy firm, to fictional prose, which I think is an accurate assessment.

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