\t\t\t\tAs the Federal budget week approaches the various commentators and interest groups are whipping themselves into a lather about what choices the Government might have or not have. A recurring theme is whether the Government should honour its election commitment in 2007 to cut income taxes from July 2009. The debate is being constructed along the lines of whether the nation can now “afford these cuts” given the “rising debt” and the “shocking state” of the budget deficit. This debate demonstrates perfectly how bad policy can be made when the Government fails to understand its options as a monopoly issuer of a non-convertible currency.
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\nThe Government has been trying to massage our expectations in the lead up to the Budget week because their is now an alleged “black hole” in its tax revenue. The Treasurer was talking today about the need to keep promise with the electorate (read: tax cuts for the rich) but at the same time they would be forced “to make unpopular decisions”.<\/p>\n
The Government has put out a series of nonsensical statements about this issue over the last week. They are under pressure to increase the unemployment benefit rate (it is abysmally low in Australia) and also to provide a $30 per week pension boost to the old-aged among us who rely on the miserably low Federal pension. The rumours (presumably the Government is putting them out in some misguided attempt to massage the public debate) are that they will increase the pension but by less than the expected $30 increase because they need some “room to increase unemployment benefits”.<\/p>\n
What is this room concept? Well for the Government which is stuck in a neo-liberal black hole of macroeconomic ignorance it means that they are worried sick about the size of the budget deficit and so think that robbing Peter to pay Paul is one useful way of showing they are responsible financial managers and “keep the debt blowout under control”.<\/p>\n
Room should actually refer to their assessment of whether it is better to have pensioners with less and the unemployed with more nominal spending capacity. Given the state of the business cycle and the parlous situation both groups of income support recipients find themselves in for different reasons, it would be a more reasonable assessment to conclude that both groups should get a hefty rise in weekly income from the Government while the latter plans the introduction of a Job Guarantee. There are no “financial reasons” constraining this choice among any of the choices that government makes on a day to day basis.<\/p>\n
In relation to the falling tax revenue, the Federal Treasurer told ABC news<\/a> today that:<\/p>\n \nThe consequence of that will be hard choices on Budget night … We will have to rearrange our priorities to make sure we can meet our commitments and also at the same time put in a medium-term strategy to make sure we’ve got fiscal sustainability … The Government will take the unpopular decisions in the interests of … supporting jobs, stimulating our economy, putting in place the long term investments for the future so we can maximise opportunities when the world economy recovers\n<\/p><\/blockquote>\n Yesterday, the Prime Minister was also trying to massage the debate. He was quoted in Jacob Saulwick’s SMH article – Swan predicts a revenue collapse of more than $115b<\/a> – that if the Government hadn’t have gone into debt there “would be a complete slash and burn of government services like not paying people the pension”<\/p>\n The PM was also reported in the Rudd hits back over budget deficit strategy<\/a> article by News Limited journalists Matthew Franklin and David Uren as saying:<\/p>\n \nWe’ve had a write-down in tax revenues for Australia of $115 billion and, given what’s happened in the global economy more broadly, obviously we think the risks there are on the downside … It means you either engage in temporary deficit and temporary borrowing to make up that shortfall in tax revenues …\n<\/p><\/blockquote>\n So the two senior Government members are spreading a litany of falsehoods about the way their own government finances work and in doing so they are likely to make bad policy choices.<\/p>\n Yes, it is true that the automatic stabilisers are working. Tax revenue falls … sharply … in a recession and the budget deficit automatically increases (or surplus decreases). That is why they are called “stabilisers” – they automatically work to expand aggregate demand when a spending gap increases (and vice versa in a growth period).<\/p>\n But note – the T-word is back. What the Government and its critics have to understand is that the deficit will be permanent<\/strong> unless the Government wants to drive the non-government sector back into dissaving and re-create the conditions for the next financial disaster. Further, these borrowings have nothing to do with making up any shortfall in tax revenues as regular readers of this blog will realise.<\/p>\n The deficit is not being funded by the debt being sold. So there is no concept that any government services would be cut if they didn’t sell the debt. The Government is choosing to sell the debt because it is currently running a money policy where the interest rate target is positive and above the support rate it is paying to commercial banks for overnight reserves. In addition, it has an ideological belief, voluntarily imposed on us, that every dollar that is “net spent” should be matched by a dollar of debt issued to the private markets. Totally voluntarily and totally unnecessary.<\/p>\n More on this soon.<\/p>\n Almost every commentator and rival is arguing that now is not the time to make these tax cuts. The budget is “blowing out”; “the cuts will be permanent and make it impossible to wind back the debt”; “the rich don’t need the money” and on and on.<\/p>\n The Australian’s National affairs editor, Mike Steketee said in his opinion piece – Pledge of the abyss<\/a> – that<\/p>\n \nTHE budget on Tuesday week is going to be full of bad policy … Because the Government insists on keeping its promises … Keeping promises is not normally bad but it is now, when there has been the biggest change in Australia’s economic circumstances since the Depression … when keeping promises is coming at a high cost to good government. Before the previous election … Labor had other priorities, such as spending money to upgrade education and infrastructure. But it played safe by making the Coalition’s tax policy its own … It neutralised the issue politically and … rationalised that the budget could afford it … Now it can’t.\n<\/p><\/blockquote>\n The national Government can always afford<\/strong> to buy whatever there is for sale. To claim otherwise is a falsehood. There is no financial constraint (afford concept) on national government spending which is not the same thing as saying it should spend infinitely.<\/p>\n