There are times when one is brought to despair at the level of ignorance demonstrated by our national and corporate leaders. An event this week highlights a case in point.
A report was released on Tuesday by a high level and independent group named the ‘Budget Balance Commission’. The commission is chaired by former Howard staffer, Paul McClintock on behalf of the Committee for Economic Development of Australia (CEDA), who launched their report, “Deficit to Balance: budget repair options” at the National Press Club on Tuesday.
The commission has 12 members and includes current Reserve Bank board member Dr John Edwards, and three former secretaries from the Department of Prime Minister and Cabinet, Dr Michael Keating, Dr Ian Watt and Terry Moran. On face value it is an impressive line-up.
The commission’s aim is to balance the federal budget which it believes can be achieved by 2018-19 if certain tax expenditure measures that most of us here at AIMN have been suggesting for the last three years, are addressed.
They recommend a flat 15 per cent discount on super contributions, removing $6.9 billion of concessions, reducing the cap for concessionary contributions to super to $10,000 removing a further $8.5 billion, reducing the capital gains discount from 50% to 25% ($3.6 billion) and abolishing negative gearing on all assets purchased after December last year ($2.6 billion).
All good so far, notwithstanding an absence of originality.
They also want to increase petrol taxes, cut the fuel tax credit scheme, cut industry tax concessions, clamp down on work related tax deductions and extend the “temporary” budget repair levy. Good luck with that.
But, to give them due credit, much of what they suggest makes sense, which is why the Turnbull government will probably ignore it.
So, what is the cause of my despair? Certainly not the recommendations in their report. What staggers me is their understanding, or lack of it, of a currency-issuing government’s capacity to manage an economy.
“No economic problem in Australia is graver than the persistence of large budget deficits,” Mr McClintock writes in the report.
Mr McClintock said it was particularly concerning that Australia had run eight years of continuous deficits during a sustained economic expansion.
Mr McClintock seems to be unaware that 82 of the last 100 Australian federal budgets were deficit budgets. “Prolonged deficit(s) penalise(s) today’s youth and future generations, who will end up paying for current spending despite Australians being wealthier than they have ever been,” he said.
By that logic, surely we must be burdened today by the collective spending weight those 82 deficits created over the past 100 years? Are we still paying for the deficits of our parents and grandparents?
No, of course not.
The report also suggests continuous deficits leave Australia with no buffer to counter future international shocks, while interest paid was money that could otherwise be spent on delivering services and infrastructure.
No, Mr McClintock, we are a currency issuing nation. We don’t need buffers. We handled the last international shock better than any other country. How did we do that? By creating money out of thin air. We can do that to deliver infrastructure too.
Foolishly, Treasury treated that money as debt by issuing bonds and now compounds that “debt” by making interest payments that were not necessary.
In any event, while Treasury records those interest payments as debits against revenue, the fact is they were created out of thin air by the Reserve Bank crediting the accounts of the bond holders. The credits have no impact on our economy. It is entirely an internalised transaction within the RBA.
But what I found more staggering was that, “The commission found that in no period since the Second World War had Australia run budget deficits during a period of economic expansion.”
What utter rubbish!
For the benefit of the Commission and anyone else interested, the Menzies era was one of the most expansionary periods in our history and it was all done by deficit budgeting.
While not wanting to discredit the commission, such blind ignorance is hard to ignore. They deserve credit for their recommendations, but their historical research needs some fine tuning as does their understanding of a fiat currency.
But if they don’t get it, what hope is there for the rest of the country. Ignorance is forgivable. It’s what comes next that matters.