Putting aside all the pork barreling and the mea culpas of the Josh Frydenberg 2019 extravaganza, what is really scary about this Fiscal Statement (aka Budget), is the forecast of surpluses over the forward estimates.
Between now and 2024, if nothing else changes (a really big ask), nearly $40 billion will be taken out of circulation, a $40 billion theft of public money that the private sector will have to replace and service.
Some of this replacement money will be corporate debt, some will be mortgage and/or credit card debt and Frydenberg seems to have ignored Australia’s private debt to GDP ratio, which is currently hovering around an alarming 200%. It is one of the largest in the OECD world and the budget projections, if realised, will push that figure higher still.
There has to be a breaking point in this trajectory, a point where consumers can’t cope with any more debt. It will be a point, when reached, that will have devastating consequences on the national economy.
It is consumer spending that drives our economy. Once that stops, or slows, economies collapse. Frydenberg might think that the mining sector puts food on our tables, or that foreign students who pay exorbitant rates for their education pay our consumer bills. They don’t. It is our purchasing power, our individual and collective ability to spend that drives our economy.
That spending power is contingent on our disposable income, that is, what is left after we have paid the mortgage, bought food, paid for power or the rent.
We saw all too clearly what happened to consumer debt when John Howard and Peter Costello were lauded for producing multiple surpluses between 1998-2007. Private debt rose dramatically as new money created on the credit card replaced the money the government removed from circulation with their surpluses.
A simple test demonstrates this: Imagine there is $1000 in a pot. The owner of the pot removes $300 and replaces it with $150. Now there is only $850 in the pot. So what, you say?
The problem is that all of the $1000 was needed to pay for essential services.
The only way those services can continue now, is for someone other than the owner, to either top up the pot by drawing down on his/her savings, or by borrowing and incurring the subsequent associated costs.
Either way, hardship of one kind or another follows and there is less spending on the part of the contributor, because they have less to spend. If the owner continues to take more from the pot than he puts back in, year in, year out, eventually the spending capacity of those who rely on the pot will be severely restricted.
This is what a surplus does.
The bad news is, that we are already at that position now! Our economy is slowing, people are cutting back on spending, mortgage stress is increasing and jobs will soon be threatened.
Some might say all this is not very good, but at least the government has an extra $40 billion in the bank. Well, yes and no. Firstly, the government doesn’t need money in the bank. It creates the money when it spends. Why would a currency issuer ever need money in the bank?
Secondly, what is the point of the government having money in the bank when it’s needed to service ongoing economic activity that stimulates spending and keeps people employed?
Why is Josh Frydenberg not being challenged on this, the most basic of laws in a market economy? Because economists don’t understand this. The only time a government can justify a surplus is when there is too much money in the pot.
One can only hope that an incoming Labor government can be convinced that this is not one of those times. Frankly, I’m not holding my breath.
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