What is the purpose of fiscal policy? Don’t ask Rachel Reeves!

It’s been a week of grand fiscal statements. Tuesday, it was for Australia as I discussed yesterday – Australian fiscal statement – rising unemployment amidst a moderate fiscal contraction (March 26, 2025). Then yesterday in the UK, the Labour Chancellor delivered the British Government’s – Spring Statement 2025. Both statements come at a time when the mainstream economics consensus is shifting with the US pushing protection and defunding many global initiatives. And, one of the statements was in the context of an impending federal election (Australia) and from a government that is in danger of losing that election to a bunch of populist Trump-copiers. And the content reflected that. The UK Statement was from a Government currently in no danger of losing office but which is progressively entrapping itself in its hubris and fiscal rules. An interesting juxtaposition. Anyway, the British Chancellor has lost all understanding of what the purpose of fiscal policy is. What is the purpose of fiscal policy? Don’t ask Rachel Reeves!

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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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Industrial disputation remains at record lows in Australia – the complete victory of capital over the working class

The Australian Bureau of Statistics (ABS) released the latest data today (March 12, 2025) on – Industrial Disputes, Australia – which covers the December-quarter 2024. The data shows that there was a slight decline in the number of industrial disputes over the last 12 months, although the number of working days lost rose significantly (by 15.4 per cent in the quarter). However, disputation remains at record lows. That fact is one of the success stories of neoliberalism and the way that the interests of Capital have co-opted government to ensure the income distribution was shifted back in favour of profits at the expense of wages. There are all sorts of explanations given to explain the low real wages growth in Australia over the last few decades and all try to sheet home the blame to global factors or demographic shifts. But the fact remains that there was concerted action by government under pressure from the employer groups to introduce legislation and regulation that undermined the capacity of the trade unions to pursue action in the interests of their members. That action was very successful from the perspective of capital and devastating to workers. Today’s blog post is really just a set of notes about the trends shown in this data.

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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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Fiscal policy must be the tool of choice to respond to major climate related calamities – BIS

“Fiscal support can manage the direct economic fallout from extreme weather events.” That quote came from an interesting new research paper published in the 98th edition of the Bank of International Settlements Bulletin (February 10, 2025) – Macroeconomic impact of extreme weather events. The paper seeks to tease out what the economic impacts and policy implications are of the climate changes that are now manifest in various extreme weather events, such as droughts, wildfires, storms, and floods, which are increasing in incidence across the globe. The researchers recognise that such events are increasingly imposing “high economic costs” and “social hardship” on communities around the world. Their conjecture is that the “most extreme weather events have been rising and are likely to increase further” which will challenge policy makers. They discuss the implication of this increased exposure to such events for fiscal and monetary policy but recognise that fiscal policy must be the frontline tool to respond to the damage caused by such events.

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The Left has created the swing to the Right – some reflections

The last several decades of what is termed the neoliberal era has led to some fundamental changes in our social and economic institutions. It was led by the interests of capital reconfiguring what the polity should be doing, given that most of the significant shifts have come through the legislative or regulative capacity (power) of our governments. In turn, this reconfiguration then spawned shifts within the political parties themselves such that the traditional structures and voices have changed, in some cases, almost beyond recognition. The impacts of these shifts have undermined the security and prosperity of many citizens and redistributed massive wealth to a small minority. The anxiety created as the middle class has been hollowed out has been crying out for representation – for political support. Traditionally, support for the socio-economic underdogs came from the Left, the progressive polity, which, after all was the Left’s raison d’être. But that willingness by the Left politicians to give voice to the oppressed has significantly diminished as it surrendered the macroeconomic debate to the mainstream and got lost in post modernism. As a consequence, the ideological balance has demonstrably shifted to the Right, and the former progressive parties have been abandoned. My thesis is that the Left has created a burgeoning return of the Right with a daring and resolve that we haven’t seen for decades. The election and aftermath of Donald Trump’s elevation to presidency demonstrates the situation. Last weekend’s general election in Germany demonstrates the situation. And today a poll was released in Australia that suggests the current Labor government, which slaughtered the conservatives in the last election just 3 years ago are now facing a clear loss to the Opposition – that is advocating Trump-style radicalism. As the saying goes – you get what you deserve.

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Australia – latest wages data shows workers’ purchasing power still going backwards

Yesterday, the RBA cut interest rates for the first time since November 2023. They claimed that further rate cuts would at least require further evidence of wage restraint, which tells you how the public debate has been so thoroughly taken over by fiction. Australia is experiencing a drought, not the regular paucity of rainfall, type of drought, but record low rates of growth in wages. The RBA defended its interest rate hikes with the assertion that they had intelligence from the business community that wages were about to break out in 2022, invoking a 1970s-style wage-price spiral in response to the initial supply shocks coming from the pandemic. Nothing of the sort happened. And the latest data shows that things haven’t changed. Today (February 19, 2025), the Australian Bureau of Statistics released the latest – Wage Price Index, Australia – for the December-quarter 2024, which shows that the aggregate wage index rose by 3.2 per cent over the 12 months (down 0.3 points on the last quarter). Quarterly wages growth was 0.7 per cent, which the ABS noted was the “Lowest quarterly wage growth since March 2022”. In relation to the December-quarter CPI change (2.4 per cent), this result suggests that workers achieved modest real wage gains. However, if we use the more appropriate Employee Selected Living Cost Index as our measure of the change in purchasing power then the December-quarter result of 4.0 per cent means that real wages fell by 0.8 points. Even the ABS notes the SLCI is a more accurate measure of cost-of-living increases for specific groups of interest in the economy. However, most commentators will focus on the nominal wages growth relative to CPI movements, which in my view provides a misleading estimate of the situation workers are in.

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Economics as politics and philosophy rather than some independent science

Last week, I wrote about – The decline of economics education at our universities (February 6, 2025). This decline has coincided and been driven by an attempt by economists to separate the discipline from its roots as part of the political debate, which includes philosophical views about humanity and nature. In her 1962 book – Economic Philosophy – Joan Robinson wrote that economics “would never have been developed except in the hope of throwing light upon questions of policy. But policy means nothing unless there is an authority to carry it out, and authorities are national” (p.117). Which places government and its capacities at the centre of the venture. Trying to sterilise the ideology and politics from the discipline, which is effectively what the New Keynesian era has tried to do, fails. The most obvious failure has been the promotion of the myth of central bank independence. A recent article in the UK Guardian (February 9, 2025) – You may not like Trump, but his power grab for the economic levers is right. Liberals, take note – is interesting because it represents a break in the tradition of economics journalism that has been sucked into the ‘independence’ myth by the economics profession.

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The Case of the Missing Report – Part 2

Today, we solve the ‘Case of the Missing Report’. Recall from – The Case of the Missing Report – Part 1 – that the Asian Development Bank published a report I had written (with Randy Wray and Jesus Felipe) – A Reinterpretation of Pakistan’s ‘economic crisis’ and options for policymakers (draft version) – in June 2009 as part of work I was undertaking for the Bank at the time on economic development in Central Asia. The report was published on June 1, 2009 as an official ADB Economics Working Paper No. 163 after our presentations were enthusiastically received at the Bank during seminars we gave. The Report was indexed by the major bibliographic and indexing services and evidence of that report still exists today. For example, the Asian Regional Integration Center provides a link to some 30 records covering – Pakistan – including our ADB paper with the official publication date. The ‘official’ link to the publication – https://www.adb.org/Documents/Working-Papers/2009/Economics-WP163.pdf – however, now returns a ‘Page not Found’ error. Then, if you search for ADB Economics Working Paper No. 163 on the ADB WWW Site you will find another paper – The Optimal Structure of Technology Adoption and Creation: Basic Research vs. Development in the Presence of Distance to Frontier – which somehow became Working Paper No 163 and was also published in June 2009. So what gives? How did our ADB Economics Working Paper No. 163 disappear from the face of the Earth to be replaced by another ADB Working Paper No. 163, all in the space of a day or so? In this Part 2 of the ‘Case of the Missing Report’, I provide the solution to the mystery.

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The Case of the Missing Report – Part 1

This blog post is a long time in gestation and I could have written in 2009 which is the relevant year of the events that I will document in this two-part series. My conversations with government officials during my working trip to the Philippines last week highlighted several things, including their sheer terror of IMF intervention and the ratings agency. I will write separately about that in a later post. But the IMF watches these types of nations like a hawk and is ready to pounce to enforce their authority at the slightest departure from the neoliberal macroeconomic policy line. As long as these types of nations concede to the IMF bullying they have very little hope of developing towards being advanced states. And IMF bullying is what this blog post is about. This is Part 1 of a two-part story that might be summarised as the ‘Case of the Missing Report’. I will solve the mystery in Part 2, which will be published on Thursday of this week.

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ECB research shows that interest rate hikes push up rents and damage low-income families

I have been arguing throughout this latest inflationary episode that the central bank rate hikes were actually introducing inflationary pressures through a number of channels, the most notable one in the Australian context being the rental component in the Consumer Price Index. The RBA has categorically denied this perversity in their policy approach, and, instead, claimed the rapidly escalating rental inflation was the result of a tight rental market, end of story. Well the rental market is tight, mostly due to the massive cutbacks in government investment in social housing over the last few decades. But the rental hikes followed the RBA rate hikes and the simple reason is that landlords when in a tight market will always pass on the costs of their investment mortgages to the tenants. They weren’t doing that before the rate hikes. A recent ECB research report – How tightening mortgage credit raises rents and increases inequality in the housing market (published January 16, 2025) – provides some robust evidence which supports my argument. That is what this blog post is about.

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Fake news is not just the practise of the Right

The daily nonsense that economics journalists pump out in search of sales for their newspapers is nothing new and one would think I would be inured to it by now. But I still am amazed how the same old lies are peddled when the empirical world runs counter to the narratives. I know that the research in psychology has found that people save time by using ‘mental shortcuts’ in order to understand the world around them. Propositions that we ride with are rarely scrutinised in depth to test their veracity. Rules of thumb are commonly deployed to navigate the external world. And we are highly influenced by the concept of the ‘expert’ who has a PhD or something and talks a language we don’t really understand but attribute an authority to it. In the field of economics these tendencies are endemic. We are told, for example, that the Ivy league universities in the US or that Oxbridge in the UK, are where the elite of knowledge accumulation resides. So an economist from Harvard carries weight, whereas another economist from some state college somewhere is ignored. And once we start believing something, confirmation bias sets in and we ignore the empirical world and perspectives that differ from our own. The consequences of this capacity to believe things that are simply untrue his one of the reasons our human civilisation is failing and major catastrophes like the LA fires are increasingly being faced.

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Bank of Japan research refutes the main predictions made by economists about the impacts of large bond-buying programs

Welcome to 2025. My blog recorded its 20th year of existence on December 24, 2024 which I suppose is something to celebrate. But when I look out the window and try to find optimism I fail. Who knows what the year holds and global uncertainty is dominating the narratives surrounding economic developments. We have a crazy guy about to take over the US along with his band of crazy guys. Government coalitions are failing all over the place and international cooperation is giving way to nationalism. We have Israel still slaughtering tens of thousands of innocent civilians using the equipment made available by the US and other advanced nations. Apparently opposing that slaughter makes one anti-semitic. I could go on. Those observations will clearly condition my thinking in the next year. But today, I am catching up on past work. On November 29, 2024, the Bank of Japan published a research paper – （論文）「量的・質的金融緩和」導入以降の政策効果の計測 ― マクロ経済モデルQ-JEMを用いた経済・物価への政策効果の検証 (which translates to “Measuring the effects of the “Quantitative and Qualitative Monetary Easing” policy since its introduction: Examining the effects of the policy on the economy and prices using the macroeconomic model Q-JEM” – the paper is only available in Japanese). The research uses innovative statistical techniques to assess the impact of the low interest rate, large bond-buying strategy deployed by the Bank of Japan between 2013 and 2023. The Bank of Japan research refutes the main predictions made by economists about the impacts of large bond-buying programs.

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The Japanese government is investing heavily in high productivity sectors and revitalising regions in the process

Last week I noted in my review of the Australian government’s Mid-Year Economic and Financial Outlook (MYEFO) – Australian government announces a small shift in the fiscal deficit and it was if the sky was falling in (December 19., 2024) – that the forward estimates were suggesting the federal government’s fiscal deficit would be 1 per cent of GDP in 2024-25, rising to 1.6 per cent in 2025-26 before falling back to 1 per cent in 2027-28. The average fiscal outcome since 1970-71 has been a deficit of 1 per cent of GDP. I noted that the media went crazy when these estimates were released – ‘deficits as long as the eye can see’ sort of headlines emerged. It was fascinating to see how far divorced from reality the understandings in Australia are of these matters. Meanwhile, the RBA keeps claiming that productivity is the problem and the reason they are maintaining ridiculously high interest rates even though inflation has fallen back to low levels. My advice to all these characters is to take a little trip to Hokkaido (Japan) and see what nation building is all about. The Japanese government has already invested ¥3.9 trillion for semiconductor industry development since 2021 (that is, 0.7 per cent of GDP) and the Ishiba government recently announced a further ¥10 trillion (1.7 per cent of GDP). Meanwhile, the overall deficit is around 4.5 per cent of GDP and no-one really blinks an eyelid. The Japanese government is investing heavily in high productivity sectors and revitalising regions in the process.

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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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The federal government would sack the RBA Board and Governor except it is too busy jumping at its own shadow

It’s Wednesday and as usual I cover a few topics briefly rather than provide a deeper analysis of a single issue. Today, I consider yesterday’s RBA monetary policy decision which held interest rates at elevated levels despite the inflation rate dropping towards the lower range of its targetting band. The RBA has lost credibility and the federal government should sack the RBA Board and Governor. The problem is that the federal government is too busy jumping at its own shadow to actually take any meaningful decisions about almost anything. I also reflect on the recent decision by the Nobel Committee to award the Peace Prize to the – Hibakusha – which reminds us of the devastation that nuclear arms can (and did) cause. Some other matters then precede today’s great music segment.

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The demise of trade unions as a countervailing power to civilise Capitalism

One of the striking characteristics of the neoliberal era has been the dramatic decline in trade union membership across the world. The decline has also been associated with depressed wages growth for workers overall, increased income inequality, reduced job security, and the rising domination of the ‘gig’ job phenomena. Related trends include rising household indebtedness (as wage suppression has led to use of credit to maintain consumption levels) and reduced housing affordability, etc. Today (December 9, 2024), the Australian Bureau of Statistics (ABS) released the latest edition of biannual – Trade union membership – for August 2024 (the latest data available), which shows that trade union membership has grown from 12.5 per cent in August 2022 to 13.1 per cent now. But that modest rise doesn’t hide the fact that trade unions are no longer serving the role as a – Countervailing power – in the labour market. The decline has many drivers and many consequences and I consider that topic a bit in this post.

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The concept of degrowth remains underspecified – reform or revolution?

I have done quite a number of podcast interviews with various hosts over the last few weeks and the discussions often turn to issues relating to the environment and what Modern Monetary Theory (MMT) has to say about those issues. Inevitably, the discussions then meandered into debates about what is possible given that we humans are estimated to be using 1.7 times the regenerative capacity of our biosphere at present. At some unknown point, but sometime, that overuse will have to come to an end as the biosphere asserts its capacity constraints in one way or another. The question that seems to interest people now is whether the existing mode of production (Capitalism) is at all compatible with reducing that ratio. My answer is always the same. Those progressives who promote the notion of ‘green growth’, which is embedded in ‘green new deal’ proposals or their ilk, seem to think that we can make the shift away from fossil fuels and reduce the claim on the biosphere within a growth paradigm while retaining the Capitalist ownership relations. For me, a system where the logic is ever accumulation of capital via the creation and expropriation of surplus value and realisation of that value as profit, is incompatible with being able to live within the limits imposed by the biosphere. If we are to have any long-term future as a race, then we will have to embrace a degrowth strategy and radically alter the way we allocate resources and our patterns of production and consumption. In a sense, Marx’s long discredited notion of the – Tendency of the rate of profit to fall – as an intrinsic feature of Capitalism, which he believed would eventually bring the system asunder, is likely to be realised as the environmental constraints impinge on the accumulation system. Simply put, the logic of Capitalism requires growth and degrowth is the anathema of that logic.

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Australia national accounts – government expenditure saves the economy from recession

Today (December 4, 2024), the Australian Bureau of Statistics released the latest – Australian National Accounts: National Income, Expenditure and Product, June 2024 – which shows that the Australian economy grew by just 0.3 per cent in the September-quarter 2024 and by just 0.8 per cent over the 12 months (down from 1 per cent). That growth rate is well below the rate required to keep unemployment from rising. GDP per capita fell for the 7th consecutive quarter and was 1.5 per cent down over the year. This is a rough measure of how far material living standards have declined but if we factor in 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 flat. The only source of expenditure keeping GDP growth positive came from government – both recurrent and investment. However, fiscal policy is not expansionary enough and at the current growth rate, unemployment will rise. 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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COP29 another Cop Out by the world’s richest nations

Over the past week, I have already indicated that a major climate activist event was going on in Newcastle, Australia, which is the largest coal export port in the world. The event – The People’s Blockade – run by the activist group – Rising Tide, which involved thousands of people concerned about climate change gathering near the harbour and engaging. But it also involved protest flotilla’s launching into the shipping channel of the Port in an attempt to block the coal shipments. The cops were everywhere and were heavy handed acting under the imprimatur of the State government which tried to ban the festival but lost courtesy of a last minute Supreme Court ruling that declared the State’s attempt was illegal. At the same time as this grassroots event was unfolding, the elites of the world gathered in Baku (Azerbaijan) under the banner of the – UN Climate Change Conference (a.k.a. COP29) – which is the main global forum for addressing coordinated strategies for the resolution of climate change. The problem is that the talkfest is really just another cop out. Nothing much was achieved and the mainstream economics fictions were at the centre of this inaction – ‘fiscal space is limited’, ‘debt unsustainable’ and all the rest of the bunk, were rehearsed. And accepting the fiction that most nations can run out of their own currency, then steered the discussions to how private finance can be facilitated by government to stump up financial support for green transitions. And at that point, we know nothing much other than more profit seeking will eventuate.

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