{"id":22723,"date":"2013-02-14T17:36:09","date_gmt":"2013-02-14T07:36:09","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=22723"},"modified":"2013-02-14T17:36:09","modified_gmt":"2013-02-14T07:36:09","slug":"australian-government-failing-in-its-most-basic-responsibility","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=22723","title":{"rendered":"Australian government – failing in its most basic responsibility"},"content":{"rendered":"

\t\t\t\tThe Australian government is demonstrating to all of us that they are mishandling fiscal policy. The background is simple. Australia saw its growth vanish and unemployment start rising in December 2008 as the financial crisis spread into the real economy. The government responded, mostly correctly, and introduced a swift and significant fiscal stimulus. The economy resumed growth, the rise in unemployment was pegged (although there wasn’t enough done to generate sufficient jobs growth), and the budget deficit rose. Before the private sector had demonstrated it could take up the spending slack and support the growth process, the Federal government became obsessed with “returning the budget to surplus”, erroneously thinking that this would separate them, politically, from the Opposition. They were wrong. The imposition of fiscal austerity has caused economic growth to slow and tax revenue growth to fall well below projections (declining world commodity prices have also not helped). First, the government abandoned their surplus promise realising that the revenue side was not going to improve sufficiently. Now, they are implying they need to hike income taxes to cover the “revenue shortfall”. If they ever had any credibility as responsible fiscal managers then it is safe to conclude they have none now. Their continued claims about maintaining a “strict fiscal policy” (read: procyclical fiscal stance) are not only moronic but they are also leading to policies which are killing growth and employment.
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\nThe ABC news story (February 13, 2013) – Swan refuses to rule out income tax hike<\/a> – reported that:<\/p>\n

\nFederal Treasurer Wayne Swan has refused to rule out increases in income tax as the Government tries to plug a revenue shortfall in its budget.\n<\/p><\/blockquote>\n

The Treasurer said:<\/p>\n

\nWhat I’ll do is the responsible thing – put in place a strict fiscal policy, make sure that working Australians get a fair go, that there is incentive in the tax system, that we build up their superannuation.\n<\/p><\/blockquote>\n

The Government is running policy which is ensuring that fewer Australians are, in fact, working. Unemployment is rising as is hidden unemployment as workers drop out of the labour force because of the weak employment growth.<\/p>\n

In recent days, the Government has learned that its Minerals Resource Rent Tax has not generated anywhere near the revenue that was expected. The forward estimate for the current year was $A2 billion and in the first six months the tax has brought in $A126 million.<\/p>\n

The reasons for the short-fall are several but centre on the excessive concessions made to the big mining companies (to stop them mounting political action), declining price of iron ore and coal and the structure of the tax as a so-called “super profits” (any excess of profits over the long-term bond rate plus an allowance for capital). The parallel royalties that are paid to states can also be wholly offset against the federal liability.<\/p>\n

Both large tax initiatives of this Government – the MRRT and the Carbon Tax – will not deliver anywhere near the revenue projected.<\/p>\n

The Government’s reaction? To tighten fiscal policy even further.<\/p>\n

The decisions taken in the – May 2012-13 Budget<\/a> – defined a planned fiscal retreat that is unprecedented in our history.<\/p>\n

In the December 2012 – Mid-Year Economic and Fiscal Outlook 2012-13<\/a> – the Government upped the ante even further claiming that their had to be harder spending cuts in the face of clear evidence emerging that the economy was slowing and the forward estimates of revenue were overly optimistic.<\/p>\n

At the time of the May 2012-13 Budget the planned budgetary shift was estimated to be at least $A38.5 billion. In the latest MYEFO the proposed fiscal shift is now $A44.1 billion or 3.1 per cent of GDP. That sort of shift towards surplus has never been achieved in known history.<\/p>\n

The following graph shows annual fiscal shifts since 1972-73 in terms of proportions of GDP.<\/p>\n

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Like all austerity-seeking governments who have assumed the private sector prefers smaller deficits or surpluses and will increase spending as a consequence of a government pursuing such a fiscal shift, the Australian government is in denial of not only the objective circumstances that exist at present (rising unemployment; outstanding and massive private debt overhang from the pre-crisis credit binge; declining terms of trade which is undermining $A export revenue but also discouraging further investment growth in the mining sector, etc), but also basic psychology.<\/p>\n

The non-mining economy is in near recession at present with unemployment undermining income growth and non-mining investment very weak. Basic psychology tells us that in those situations private spending binges of the size required to “more than offset” the public cutbacks will not be forthcoming.<\/p>\n

However, there was also some dishonesty in the way the government presented the data.<\/p>\n

In the May 2012-13 Budget statement it was obvious that at least $A8.5 billion in spending that will flow this year was shifted to be recorded against the 2011-12 outcome. So the deficit in 2011-12 was artificially inflated, which just happened to allow them to record a paper surplus despite the degree of contraction associated with the 2012-13 fiscal position being less than would be forthcoming if there really had have been a 3.1 per cent of GDP withdrawal in one year.<\/p>\n

In other words, the degree of contraction this fiscal year is actually less in 2012-13 than the nominal figures suggest. How much less is a guess but if we subtract the $A8.5 billion from last year and add it to this year then you are talking a $A27 billion fiscal shift, which is about 1.8 per cent of GDP.<\/p>\n

More importantly, this means the underlying fiscal position in 2012-13 is not a surplus at all but a deficit of some $A7.4 billion (0.5 per cent of GDP).<\/p>\n

Whatever the actual numbers turn out to be, and the deviousness aside, the direction of fiscal policy is completely wrong. Even if it ends up being a 1.8 per cent of GDP contraction that scale of fiscal shift i one year is also unprecedented historically and is totally unsuitable at a time when non-government spending will not offset the loss of public net spending.<\/p>\n

The question that has to be asked is under what circumstances would a Government be responsible in taking out net spending equivalent to 1.8 per cent of GDP in one year (when inflation is forecast to be constant or falling)?<\/p>\n

You have to ask this question in the context of actual real GDP growth has slowed since the June-quarter last year and is now well below trend growth of 3.25-3.5 per cent. It is likely to be running at around 2 per cent per annum at present and trending downward. The main growth engine – private investment has slowed as a result of the slump in commodity prices.<\/p>\n

Please read my blog – Australia National Accounts – its getting worse<\/a> – for my discussion of the September-quarter National Accounts that came out in early December 2012.<\/p>\n

But the only way it would be responsible for the Government to consider such a fiscal withdrawal would be if the economy was pushing well above trend and straining the inflation barrier – with full employment and zero underemployment – and private growth would have to be very strong and becoming even stronger during the forecast period.<\/p>\n

There have never been conditions like that in the last 40 years. Nor was there any possibility of those conditions being realised in the foreseeable future.<\/p>\n

That is why the scale of fiscal withdrawal announced in the last Budget was a demonstrable act of vandalism and driven by misguided (miscalculated) political machinations and is devoid of any economic rationale. Those machinations considered that if the government shouted hard enough and long enough about the virtues of a budget surplus then people would support their claim that the government was a responsible fiscal manager.<\/p>\n

But with growth declining and unemployment rising the political calculations will turn out to be amiss.<\/p>\n

And now the Government is hinting at more austerity in the upcoming May budget – which will take the fiscal debate into the election year.<\/p>\n

They should read the recent article by the Financial Times (February 12, 2013) – The case for helicopter money<\/a> – written by its economics correspondent Martin Wolf.<\/p>\n

The helicopter references comes from Milton Friedman’s suggestion in the introduction (page 4) to his collection of essays – ‘The Optimum Quantity of Money and other Essays”, Chicago: Aldine Publishing Company, 1969 – that a chronic episode of price deflation could be resolved by “dropping money out of a helicopter”.<\/p>\n

While I do not agree with all the points that Martin Wolf raises and the terminology used, the basic tenor is sound. He is considering macroeconomic policy choices and indicates that:<\/p>\n

\nMeasures of broad money have stagnated since the crisis began, despite ultra-low interest rates and rapid growth in the balance sheets of central banks.\n<\/p><\/blockquote>\n

The erroneous money multiplier model in mainstream economics textbooks between bank reserves and the “stock of money”. Please read my blog – Money multiplier and other myths<\/a> – for more discussion on this point.<\/p>\n

In Modern Monetary Theory (MMT) there is very little spoken about the money supply. In an endogenous money world there is very little meaning in the aggregate concept of the “money supply”.<\/p>\n

Central banks do still publish data on various measures of “money”. The RBA, for example, provides data<\/a> for:<\/p>\n