\t\t\t\tI imagine it goes like this. Your driving along listening to the radio and the Australia Treasurer comes on and is saying that we need a budget surplus because we have a once-in-a-hundred years mining boom and are near full capacity but given the government tax take is seriously below the forward estimates because growth is slowing, the government has to have even more drastic cuts in spending in the upcoming May budget than first thought. Why? To achieve the budget surplus! Then the Opposition spokesperson for matters economic says we are running out of money. And us ordinary citizens take it all in because it is headline news this lunchtime and we become entrapped by the logic of the situation as set out by the journalist who fuels the discussion along these lines. The only problem is that I am not an ordinary citizen in this context. The problem lies in the starting premise – the blind pursuit of the budget surplus. All the rest of the nonsense follows from that ill-conceived goal. It is getting ridiculous though.
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\nThe story I am about to tell actually happened. The characters in the story have had their identities deliberately revealed (by me) so that normal people will point at them in the street and giggle about them every time they appear in public.<\/p>\n
The story also crosses national borders and while set in sleepy Australia is of relevance to the US and the UK and almost everywhere else that I can think of.<\/p>\n
This morning the headline in the Sydney Morning Herald (April 20, 2011) was – Mine boom a budget buster, says Treasurer<\/a>.<\/p>\n The ABC reported (April 20, 2011) – Swan rules out mining revenue windfall<\/a>.<\/p>\n This was followed up by an extensive news coverage all morning and a feature on the lunchtime ABC radio current affairs program – The World Today – Swan’s resources gloom questioned<\/a>. You can hear the audio HERE<\/a>, although I warn you the discussion and contributions from our nation’s leaders is deeply disturbing given that they are not currently employed as comedians.<\/p>\n The background: Australia is meant to be having a one-in-a-century-mining export boom which is, as the story goes, pushing our economy beyond the inflation barrier as we approach full capacity. Little details like 12 per cent labour underutilisation rates and negative contributions from net exports to the most recent National Accounts are seemingly skipped in this story.<\/p>\n Australian Labor governments have been typically lambasted by the conservatives as being a free-spending and economically irresponsible. This has led recent Labor governments to be more neo-liberal than the neo-liberals to dispel the conservative fears that they are poor fiscal managers.<\/p>\n So at the height of the downturn, the Government pledged it would return the budget to surplus in record time after two stimulus injections helped save the economy from a recession of the type plaguing the US and other nations. There was no immediate economy arguments used to justify this policy goal – it was just a political statement by people who don’t understand what they are saying but know full well that almost everyone else is in the same boat and will be beguiled into thinking this is good economic management.<\/p>\n People like me say that the Government is mad to be locking itself into these rigid fiscal policy targets especially when there is so much productive labour lying idle and the signs are that the economy is slowing rather than booming. We argue that by trying to pursue a budget surplus when there is an external deficit means that either the economy will slow down sharply (if private domestic firms and households continue to adopt a subdued spending outlook or that the private domestic economy will grow on the back of increased indebtedness – an unsustainable strategy.<\/p>\n More recently, the Government has been justifying the surplus goal and the need for harsh cuts in the May Budget on the grounds that the mining boom is so strong that the public sector has to clear some “room” for the private expansion lest it invoke an inflationary spiral. All the talk is “up” – growth, mining boom, soaring wealth, growth.<\/p>\n The Prime Minister gave a speech last week to outline the Government’s position on how to handle this “growth”. Please see this blog – Australian Labor Government abandons its roots<\/a> for my discussion of that speech.<\/p>\n She said:<\/p>\n \nIf government doesn’t step back when the private sector employs more people, spends more money and builds more projects, we will be chasing the same scarce resources, driving up prices and adding to the inflationary pressures arising from the investment boom.\n<\/p><\/blockquote>\n It is true that if the economy was at full employment (that is “chasing the same scarce resources”) and private spending growth quickened and<\/strong> the public-private mix of resource usage was advancing public purpose then yes – the government would have to allow its budget deficit to fall (either cyclically and if that is not enough to ease back behind the demand-pull inflation barrier then discretionary cuts (in the structural component) have to be made.<\/p>\n Then the news comes out last week and into this week that the economy is slowing and tax revenue is falling. The Treasurer’s reaction – we need harsher spending cuts in the May Budget than previously thought necessary.<\/p>\n Why? Answer: because the slowdown in economic activity is causing a collapse in tax revenue which will prejudice our surplus target.<\/p>\n Why are you pursuing a surplus? Answer: because the economy is at full capacity and we are in the midst of a one-in-a-century mining boom.<\/p>\n What?<\/p>\n