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A surplus is not what we need

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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13 comments

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  1. Denis Hay

    Agreed John, a Federal Government deficit is a private sector surplus. The only way a Federal Government can have a surplus is to take money out of circulation. We have high unemployment and underemployment and the Federal Government should be spending into the economy as much as it takes to so everyone can have a dignified, secure job.

    This video will explain: https://youtu.be/9EnNjowvLro

  2. Matters Not

    John, Chris Bowen, the Treasurer in waiting, promises even bigger (and supposedly better) surpluses. And he’s not for the turning because he sees surpluses as a political badge of honour. To date, he’s supported in that view by Leigh and Chalmers – the economic team. Or at least, they are not publicly opposed.

  3. paul walter

    More revenue to be gained from ensuring TNC compliance, the money then needs to go on issues involving need, not greed. The proposition concerning the unemployed was imbecilic.

  4. Alcibiades

    Having been inspired by Scott Morrison & Josh Frydenberg to run my personal affairs as they have run & intend to continue to run our government & Oz economy, to achieve the holy grail of a ‘Surplus’ … what could possibly go wrong ?

    Being a disabled veteran of limited means, my options are also therefore, limited. Hence :

    (1) One will continue to only pay the interest, only, no principle, on my net cumulative debt. It should have only more than doubled within a short six years,

    (2) Cease providing proper medical care & food to my older Rescue/Assistance dog. She is no longer capable nor fit to work, and as she is not having a go, no longer deserves a go. Josh inspired this decision with SWFA for the over 50’s perpetually condemned to newstart, along with pensioners, et al.

    (3) Reduce my young Rescue/Assistance dogs food and care to just below subsistence level. He is still technically a pup, immature & unable to competently perform his role. Until he matures & actually ‘works’ for his keep, this will continue. To get a go, ya gotta have a go. And he must of course be taught the 1850’s Puritans lesson of ‘Mutual Obligation’.

    (4) Whilst still achieving a minor surplus overall one will be able to allocate a small amount to wise & sound long-term investments in Coal, unsolicited scams by telemarketers & Invisible Pink Unicorns.

    (5) Collecting my personal natural resources of Solar Water & Power, packaging & exporting it ALL, and subsequently re-importing & buying it back for my own consumption for no net gain or even a significant net loss (by a factor of 3-6 to 1). Our Oil & Gas exports, such as LNG (~$30Bn loss), under the PRRT was inspiring.

    With just the above four(?) steps alone, one confidently declares a projected minimal financial surplus in 1-2 years time. Maybe even sufficient to order delivered take-away, once.

    Am uncertain of the potential effects on my own health/survival as a consequence, nor sure that my beloved dogs may not turn on me, let alone how to deal with my ballooning (doubled?) net debt in the future, whilst sqaundering my resources for nada.

    Yet, Scotty & Josh have taught me that ‘Tough Love’ and a projected ‘surplus’ are the key to a happy clappy life, financial success, & stable growth, in the domain of my personal household economy.

    “Grrrh! Grrrh!” Oops, ‘twould seem my dogs may, um, er … disagree …

  5. Keitha Granville

    Brilliant Alcibiades, a perfect example. I wish that the bulk of people out there could follow this basic logic and understand that surplus means going without, at least some people will go without. Mostly all of us poor people, never the MPs themselves. They never go without as their provisions are never included in cuts.

    Bring on the revolution.

  6. totaram

    Keitha: It is not just “going without” that creates a surplus. In the case of the federal government, it is “unnecessarily going without” as the surplus is just money that this government can create at any time and does not need to “save” for some “rainy day” in the future. That is what John Kelly is trying to explain.

  7. Barry thompson.

    Look on the brightside Alcibiades, you will not need funeral insurance as your underfed dogs will dispose of your remains.

  8. Alcibiades

    They’ll get a feed. Bonus: The forensic clean up crew will only have to bag the bones (picked clean).

    Unfortunately whilst also stupidly squandering my limited funds & natural resources for no return, and closing the wallet, I’ll also damage my local community, local businesses and contribute to my locally employed neighbours being sacked and replaced with Electronic Checkouts. That’s assuming only a percentage of them go out of business due to reduced revenue/turnover. As the cumulative effect of my actions & thence my formerly employed neighbours subsequently spreads & snowballs, compounding the consequences … ripples upon a pond ?

  9. Lambert Simnel

    But would this be an environmentally sustainable method, Barry, given the toxins in his system?

    It does seem to point to a form of recycling.

    What if we got inventive and sent the cadaver to a privatised nursing home where they could mince it for sausages, for staff and patients?

  10. RomeoCharlie29

    Alcibiades, and you shouldn’t forget the one free meal a week you will be able to afford with the tax break — oh, perhaps like me, you don’t pay tax anymore? Never mind you will get the $75 electricity bribe or, in my case $62.50 being one of a couple. What a fucking joke. And John keep pointing out the nonsense of budget surpluses. Please.

  11. Alcibiades

    RC29,
    No tax these days M8Y. The $75 electricity bribe ? ~$1.40 a week won’t even by me a cup of prepackaged ‘Suimin’. My electricity went up 40% this January, and that was on the carefully researched & selected best tariff available. Which the relevant retailer had made considerable efforts to hide/obscure. My natural gas costs $400+/pa without consuming any, no cooking/heating, even with no pilot lights burning. See: Fixed daily service charge.

    Lambert,
    “… it’s people. Soylent Green is made out of people! They’re making our food out of people…”

  12. Lambert Simnel

    They are sick sadistic pigs, Al.

  13. Ill fares the land

    As with refugees, the concepts of “surplus” and “deficit” have been hijacked for political purposes. There is nothing intrinsically laudable in a surplus and nothing inherently diabolical or debauched about a deficit. Neither really says a great deal abouot the economic credentials of the prevailing government. In the end, each simply reflects how much money the government has withdrawn from circulation in the case of a surplus or injected into the economy in the case of a deficit.

    But each side of politics knows that it can gain advantage from claiming kudos for a surplus or criticising the other side for a deficit. This elevates both notions into a rather farcical territory where people who have no real understanding of government finances and the concept of a fiat currency listen to the lies being peddled by governments and oppositions.

    Refugees are demonised well beyond reality (as are those on Centrelink benefits) to serve political ends and that also happens with the fiction that is annual government accounting and budget-setting.

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