{"id":33481,"date":"2016-05-04T04:10:23","date_gmt":"2016-05-03T18:10:23","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=33481"},"modified":"2016-05-04T04:10:23","modified_gmt":"2016-05-03T18:10:23","slug":"australian-government-doesnt-deserve-office-nor-does-the-opposition","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=33481","title":{"rendered":"Australian government doesn’t deserve office, nor does the Opposition!"},"content":{"rendered":"

\t\t\t\tYesterday (May 2, 2016), the Reserve Bank of Australia (RBA) dropped the short-term policy interest rate by 25 basis points (1\/4 of a percent) to 1.75 per cent, a record low as a result of its assessment of a weakening economy and the deflation that has now been revealed by the ABS. I wrote about the latest CPI data in this blog – Australia enters the deflation league of sorry nations<\/a>. The fact that the RBA is trying to stimulate growth is a sad testament to the current conduct of the Australian government (and the Treasury), which despite all the lying rhetoric that its corporate tax cuts, revealed in last night’s fiscal statement will stimulate jobs growth, is actually continuing to undermine growth. The fiscal contraction implied by last night’s statement by the Federal Treasurer is modest next year and then gets sharper in the year after (2017-18). Many would conclude that the contractionary shift is benign. However, in the context that the strategy is being delivered, the actual need is for the discretionary fiscal deficit to rise by around 1 to 1.5 per cent of GDP, at least, not contract at all. The federal government has moderated its ‘surplus at all costs’ mania which dominated the macroeconomic policy debate a few years ago but is still aiming for a surplus (or close to it) within 4 years. It will fail in that goal because the non-government spending behaviour will not allow that outcome and the government’s own fiscal contraction over that period will undermine growth further. The early statements by the Federal opposition are also idiotic. It is claiming it would make ‘tougher’ decisions (that is, cut the deficit more sharply). That just means it would end up with higher levels of unemployment than the conservatives will under their current strategy. Both unemployment levels will be unacceptable. Neither major political party in Australia is fit for office!
\n<\/p>\n

In the – Statement by Glenn Stevens, Governor: Monetary Policy Decision<\/a> – the RBA said:<\/p>\n

\nAt its meeting today, the Board decided to lower the cash rate by 25 basis points to 1.75 per cent … This follows information showing inflationary pressures are lower than expected.<\/p>\n

The global economy is continuing to grow, though at a slightly lower pace than earlier expected, with forecasts having been revised down a little further recently … Australia’s terms of trade remain much lower than they had been in recent years … uncertainty about the global economic outlook and policy settings among the major jurisdictions continues. Funding costs for high-quality borrowers remain very low and, globally, monetary policy remains remarkably accommodative.<\/p>\n

In Australia … growth is continuing in 2016, though probably at a more moderate pace. Labour market indicators have been more mixed of late.<\/p>\n

Inflation has been quite low for some time and recent data were unexpectedly low. While the quarterly data contain some temporary factors, these results, together with ongoing very subdued growth in labour costs and very low cost pressures elsewhere in the world, point to a lower outlook for inflation than previously forecast.\n<\/p><\/blockquote>\n

In central bank-speak, the statement means that the RBA is worried that the world economy is becoming stagnant and the Australian economy is performing poorly.<\/p>\n

It is also worried that inflation has now turned into deflation and is well below the target range of 2-3 per cent.<\/p>\n

In other words, it is doing the only thing it thinks will help boost demand – cut the cost of borrowing.<\/p>\n

But, this is a weak policy instrument. Borrowing is not constrained by cost at present, given how low interest rates already are.<\/p>\n

The reason business firms are not borrowing is because the spending outlook in the rest of the economy is looking weaker and the existing capacity is more than enough to satisfy the well-below trend spending growth.<\/p>\n

And, please disregard the journalists last week that were trying to claim the data doesn’t indicate deflation.<\/p>\n

The only accepted definition of deflation is a decrease in the general level of prices or a negative inflation rate. It is not the same as the technical definition of recession, which requires two successive quarters of negative real GDP growth to be recorded.<\/p>\n

To claim that as one journalist did last week that “it’s simply not true … Not even close” that the negative inflation data last week indicated that Australia entered the league of sorry nations now recording deflation shows that she has lost a basic understanding of the topic she was writing about.<\/p>\n

She claimed that anyone suggesting that Australia had entered a deflationary phase (after recording a negative inflation rate of -0.2 per cent) would also probably claim that “England took homethe Ashes because they won the first inning”.<\/p>\n

An analogy is was a put-down’ attempt by the journalist being a smart-A, but pitiful nonetheless. There is no correspondence between the inflation record and a cricket match, sorry.<\/p>\n

But I digress.<\/p>\n

The Federal government’s fiscal strategy outlined in last night’s – Fiscal Statement Speech<\/a> – to the Parliament should be seen the light of a weak economy with elevated levels of unemployment and underemployment and increasing inequality.<\/p>\n

I don’t intend to analyse the fiscal statement in minute detail – it doesn’t really deserve that at a macroeconomic level, given how flawed the strategy is.<\/p>\n

There is a plethora of detail at the micro level that different groups will have to come to terms with to determine who gains and who loses.<\/p>\n

But at the macroeconomic level – the collective as a nation – we all lose as a result of this incompetent and venal display by a failing conservative government.<\/p>\n

To understand why context matters, please read the following blog – MMT Fiscal Principles<\/a>.<\/p>\n

There you will see that a responsible fiscal policy requires two conditions be fulfilled:<\/p>\n

1. The discretionary fiscal position (deficit or surplus), which is net of the automatic stabiliser effects (the cyclical impact on the fiscal balance) must aim to fill the spending gap between the non-government saving minus investment minus the gap between exports minus imports.<\/p>\n

If the non-government sector is not willing to spend all its income (that is, recycle the income back into demand) to maintain the current levels of output, then there is only one sector left that can do it – the government sector via deficit spending.<\/p>\n

2. When filling that spending gap, the government has to ensure that the non-government saving, import and investment levels are at their full employment levels.<\/p>\n

These conditions specify a strict discipline on fiscal policy if<\/strong> the aim is to achieve full employment.<\/p>\n

The 2016-16 Fiscal Statement (‘the Budget’) fails badly when judged against these conditions. To make matters worse, it doesn’t even consider them in any explicit way.<\/p>\n

Not many other commentators or rival politicians seem to understand them either.<\/p>\n

The context<\/h2>\n

he Australian government likes to tell us that the Australian economy is close to or at full employment. They frame their fiscal responses as if that was true.<\/p>\n

The fact is that the Australian economy is a hundreds of thousands of jobs short of being at full employment and as a consequence the fiscal stance of the Government has been too biased towards austerity.<\/p>\n

There needs to be a greater deficit to generate higher levels of activity in the economy and more employment given the current spending preferences of the non-government sector.<\/p>\n

Here are some summary facts:<\/p>\n