Posted: September 23, 2005

Fiscal drag out of control!

We have been so busy that it has been hard to keep the Blog happening. However, I cannot avoid making a comment on the latest news. There are two very disturbing trends on the economic horizon in Australia at present. First, is the news from the Treasury (reported by the ABC news today) that the "The Federal Government has recorded a higher than expected budget surplus. Final budget outcome figures released by Federal Treasurer Peter Costello reveal an underlying cash surplus of $13.6 billion in the last financial year.The surplus is $4.4 billion higher than expected at the time of the release of the last federal Budget."

The stated reason for the surprise result is that there has been "a lower than expected take up of grant and subsidy payments across a range of programs." Which means that government spending is less than planned. Coupled with the booming tax revenue (partly driven by the rising price of oil) this result represent a massive new fiscal drag on the growth rate of the economy. It reduces the capacity of the economy to produce enough jobs. Given there are approximately 1.8 million Australians with no work or not enough work, the handling of the Federal Budget represents a manifest failure of macroeconomic policy to pursue the essential goals of full employment and income maximisation.

In addition, the rising oil prices will probably start impacting on business costs and then pass through to higher prices very soon. The PM admitted this today. Then things get very interesting (and worrying). It is likely the RBA will react by pushing up interest rates which will have two effects: (a) it will stifle interest-sensitive expenditure (investment and consumer durables); and (b) more worrying is that it will threaten the balance sheets of the heavily-indebted private household sector. Bankruptcies on a wide scale will accompany any significant increase in interest rates.

When these dynamics start to play out the impact of the fiscal drag coming from the Budget surplus will be revealed in a stark form. Then unemployment will rise sharply and the downward spiral will worsen.

The second disturbing news today is the report from the Melbourne Institute that underemployment is now a bigger problem in volume terms than offical unemployment. The Melbourne Age reports Underemployed outnumber jobless and found that "Almost 50 per cent of men and nearly a third of women who worked part-time were underemployed.". In total, an estimated 600,000 Australians cannot find enough work. Given that around 60 per cent of all new jobs created in Australia are now part-time and around 60 per cent of those jobs are precarious, low-paid casual jobs the Government claims of overseeing a labour market success story are far fetched indeed.

It is clear that these trends point to a failed macroeconomic policy strategy. The Australian economy does not generate enough work for those willing to undertake employment. The Government seems intent on making the victims take the blame with their pernicious work-test regimes and stigmatisation of the disadvantaged. It would be better going into budget deficit and creating jobs that offer enough hours for all those who want more work. That would be something which they could sing their praises about! As it stands, they are failures.

Blog entry posted by bill