{"id":16807,"date":"2011-11-08T17:46:44","date_gmt":"2011-11-08T06:46:44","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=16807"},"modified":"2011-11-08T17:46:44","modified_gmt":"2011-11-08T06:46:44","slug":"economy-faltering-australian-treasurer-we-will-cut-harder","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=16807","title":{"rendered":"Economy faltering – Australia’s wind-up Treasurer “We will cut harder”"},"content":{"rendered":"

\t\t\t\tOn May 10, 2011, the Australian Treasurer delivered his Budget Speech 2011-12<\/a>. At the time I wrote these blogs – Australian Federal Budget – more is not less<\/a> and Time to end the deficits are bad\/surpluses are good narrative<\/a>. Some 6 months later the Australian government received news (November 07, 2011) – Swan warned on surplus timeline<\/a> – that indicated the economy was slowing and tax revenue was going to be much lower than estimated. It is becoming obvious to most people now (what was clear months ago) that the Government’s obsession with achieving a budget surplus is undermining the growth prospects of the economy. They should never had withdrawn the fiscal support in the first place but now they should definitely abandon this surplus obsession. The Australian Treasurer was like a wind-up doll yesterday when told the economy was faltering. All he could say was “We will cut harder”. Moronic.
\n
\nThe report from a private forecasting firm suggested that the Government had to abandon its “plan for a budget surplus in the next financial year” and that “further cuts to spending as the Government tries to honour its pledge to get back into the black by the end of 2012-13 … could harm the economy”.<\/p>\n

I would say will definitely<\/strong> harm the economy.<\/p>\n

The report merely repeats what some of have been saying for months – when the Treasurer first made the pledge – that the economy is not strong enough (that is, external activity and private spending is not strong enough) to justify a surplus or allow a surplus to be achieved (without massive damage to real GDP growth.<\/p>\n

The Treasurer said in response that:<\/p>\n

\nWe’ll take commonsense decisions … We’re always on the lookout for savings. We’ve been up for a very big savings task over four years. We will be making further savings with this process but we’ll do it in a way that’s consistent not only with the economic outlook but with our fiscal rules.\n<\/p><\/blockquote>\n

He later elaborated<\/a>:<\/p>\n

\nWe are certainly determined to bring our budget back to surplus in 2012\/13 … That means tough decisions will have to be made in terms of the budget … In past budgets we have found over $100 billion worth of savings. So we go through that process.\n<\/p><\/blockquote>\n

He also accused the Opposition of preaching a “bit more voodoo economics” when the latter changed a policy which left their own budget surplus estimates some $A70 billion short.<\/p>\n

To understand why this obsessive pursuit of fiscal rules is damaging the following logic applies.<\/p>\n

The budget estimates were based on assumptions that at the time were too optimistic and in the passing of time have been revealed to be so. The constant narrative that our “once-in-a-hundred-years” mining boom was going to bring bounty to all of us has fallen well short of realisation. Employment growth has been virtually zero for some months and other indicators of growth are faltering.<\/p>\n

The ABS published the latest International Trade in Goods and Services, Australia<\/a> for September 2011 today which showed the trade surplus (before invisibles) narrowing with exports falling on the back of declining terms of trade (so prices rather than volumes falling).<\/p>\n

The The RBA Commodity Price Index<\/a> is showing that commodity prices have fallen by around 4 per cent in the past three months.<\/p>\n

The talk among those who analyse the data is that the export boom is slowing and increasing current account deficits (with trade deficits) are likely.<\/p>\n

The private sector in Australia has not filled the spending gap left by the government fiscal withdrawal. There was no sound reason to assume it would given how much debt it is carrying as a result of the credit binge leading into the crisis.<\/p>\n

The external sector continues to act as a brake on growth.<\/p>\n

So tax revenue is falling below estimates because real GDP growth is not as robust as the Treasury claimed. Further, the world economy is imploding which will further undermine our export revenue.<\/p>\n

The Treasurer at that point should admit this and demonstrate leadership by introducing new fiscal stimulus measures to ensure our growth trajectory lifts and we avoid getting dragged back into the mire that many advanced economies are now headed for (or in).<\/p>\n

Let’s go back to May 2011 when the Treasurer delivered his Budget Speech. In that Speech he said (among other things) that:<\/p>\n

1. “the purpose of this Labor Government, and this Labor Budget, is to put the opportunities that flow from a strong economy within reach of more Australians. To get more people into work, and to train them for more rewarding jobs. So that national prosperity reaches more lives, in more corners, of our patchwork economy”.<\/p>\n

2. “And to succeed in the good times as we did in the bad – by choice, not by chance – by applying the best combination of hard work, responsible budgeting, and well-considered policies to the difficult challenges ahead”.<\/p>\n

3. “And just as deficits are the right thing to fight a global recession, or to rebuild from natural disasters, so too are surpluses right for an economy set to grow strongly again. We have imposed the strictest spending limits … ensuring our country lives within its means. We are on track for surplus in 2012-13, on time, as promised”.<\/p>\n

4. “our commitment to tightening our belt has not diminished one bit. We’ll be back in the black by 2012-13, on time, as promised. The alternative – meandering back to surplus – would compound the pressures in our economy and push up the cost of living for pensioners and working people”.<\/p>\n

5. “We will reach surplus despite company taxes not recovering like our economy”.<\/p>\n

6. “Our economy transitions from sluggish growth to stretching at the seams; our Budget from deficits in tough times to surpluses in better times”.<\/p>\n

And so on … you get the message.<\/p>\n

This is the same nonsense that has driven the UK economy backwards since the new government took office in May 2010. Claiming that consumers and firms were just waiting for a commitment by government to lower the budget deficit before they would unleash a renewed spending burst (the Ricardian equivalance argument), the British government embarked on a harsh austerity drive – with the worst is yet to come.<\/p>\n

The British economy started to slow almost immediately they were elected and promising drastic cuts and has been going backwards ever since. Yesterday’s release of the BRC-KPMG Retail Sales Monitor<\/a> – which has a good track record in predicting movements in spending showed how bleak things have become in Britain.<\/p>\n

The Monitor reports that:<\/p>\n

\nUK retail sales values were 0.6% lower on a like-for-like basis from October 2010, when sales had risen 0.8% … Food sales growth slowed and non-food sales also weakened, with big-ticket items suffering most.\n<\/p><\/blockquote>\n

The official commentary went like this – “Which part of the wave we’re riding varies from month to month but the water is consistently chilly … This is evidence of the basic weakness of consumer confidence and demand and worrying this close to Christmas”.<\/p>\n

There has been almost “no growth in non-food sales”.<\/p>\n

The British government is single-handedly undermining private sector confidence and destroying jobs and private wealth. History will not judget their obstinate pursuit of free market ideology very well.<\/p>\n

So while the Australian economy is not in as bad a shape as Britain the same vandalism by elected governments is out in force.<\/p>\n

In Budget Paper No 1<\/a> you find the Table 1: Domestic economy forecasts, which provide the forward estimates of the key economic indicators that condition the budget estimates.<\/p>\n

Budget Paper No. 1 says:<\/p>\n

\nThe current account deficit is expected to narrow sharply in 2010-11, reflecting the expected increase in the terms of trade, and then widen in 2011-12 and 2012-13, reflecting strong growth in import volumes and the expected gradual fall in the terms of trade. The trade balance moved into surplus in 2010-11 and is expected to remain in surplus over the next two years. The net income deficit is expected to widen over 2011-12 and 2012-13, as rising export earnings generate increased equity income outflows.\n<\/p><\/blockquote>\n

I agree that is likely to occur – an ongoing deficit – or drain to domestic demand (spending). This is one of the areas of macroeconomics that people find it hard to get their head around. Australia is enjoying record terms of trade (the prices of exports relative to imports) and export volumes are strong.<\/p>\n

And with all the crazy commentary in the media (which is tapering off lately) about our “once-in-a-hundred-year” mining boom creating conditions of wealth never before seen, it is little wonder that people are looking for the golden lining.<\/p>\n

But the reality is that the external sector remains a contractionary force because more of the income we earn from our booming exports are going into imports. So the rest of the world is actually enjoying our mining boom in terms of growth impetus. We end up with lots of imported gadgets etc but a drain on growth. I realise this is hard to for people to understand.<\/p>\n

The following Table is constructed from the actual Budget estimates presented in May 2011. The Budget balance and Current account balance are taken directly from Budget Overview<\/a> (budget balance) and Budget Paper No 1<\/a> (external balance).<\/p>\n

The Private Domestic Balance is then computed according the National Accounting rule that the sum of the balances has to equal zero.<\/p>\n