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Expect some Rubbery Figures in the Budget

It is perhaps a tad unwise to try and second guess the budget to be handed down next Tuesday, but some things need to be made clear, especially to those who might be fooled by what is expected to be a pre-election handout.

Regardless of how Treasurer Scott Morrison might try to sugar-quote the numbers with his breathtaking rhetoric, be assured at least some of his forward projections will be based, not on hard numbers, but more likely, on aspirational and ambitious expectations.

In other words, it’s going to be a budget fit for purpose, but not the national purpose. We can expect some rubbery forward projections that will pave the way for some pretty ambitious outcomes that his party can spruik as we head toward the election, later this year.

The ever-optimistic Morrison who foolishly convinced himself that a return to surplus was only two years away, might be of a mind to project a surplus as soon as next year. If he does, don’t believe a word of it.

He has the figure of 23.9% of GDP in mind as the maximum amount he can receive in tax (it’s a Liberal party yardstick). BUT, should we be watchful of what GDP figure is he basing his projections on? Yes we should. Expect a rosy one. If he can inflate the expected GDP for 2018/19, he can spend a little more and still show a reduction in the projected deficit.

That’s what creating rubbery figures is all about. And if he creates enough rubber in 2018/19, to show a reduced deficit, that makes creating rubber for 2019/20 and the subsequent forward estimates that much easier.

Hence, the temptation to project a small surplus in 2019/20, one year ahead of previous estimates. Again, if he does, don’t believe a word of it. There’s no good reason why the figure of 23.9% needs to be adhered to. Most OECD countries have higher levels than that.

But, 23.9% is dogmatically enshrined into the psychology of Liberal minds. So, if Morrison wants to spend more as he searches for election sweeteners, all he has to do is increase his estimate of what the expected GDP for 2018/19 will be and still appear economically responsible.

From there, he can estimate a higher tax take and a lower deficit. Simple. After all, it’s just numbers in a computer and they can be changed down the line as circumstances require.

So don’t be fooled by whatever comes out of Morrison’s mouth on Tuesday. In fact, the rosier it looks, the less likely it is, that it will be true.

It is unfortunate that Morrison seems to think that running a national economy is the same as running a household. It is not. A currency issuing government is only constrained in its spending by the available resources. It’s “debt”, issued in its own currency, can always be repaid.

No one will be knocking on the government’s door to repossess anything. Sadly, Morrison does not understand this, and neither does his government. He should, however, be concerned about private debt. That is the great threat to the Australian economy, not magical numbers expressed as a percentage of GDP.

It is private debt that threatens to bring the country down. RBA chief, Phillip Lowe knows this and has said as much. But Morrison is not looking at private debt. He has a fixation with government debt.

As the currency issuer, the government can safely spend 100% of its GDP without the fear of inflation so long as that spending leads to productive outcomes. And, it never needs to borrow.

Borrowing, via the issuance of bonds is a political choice, not an economic one. It’s high time economists started stating these simple facts, rather than the emotion-charged, political claptrap they sprout forth now.

They won’t, of course. They will fall into line and spread the gospel according to their media owners, who just happen to believe in the household economy myth.

Morrison will talk a lot about that on Tuesday night.


17 comments

  1. Graeme Henchel

    The one thing you can be 100% sure of is that the coalition budget will be deceitful. Built on lies and sold with lies. It’s the coalition way.

  2. etnorb

    Sadly, I am unable to expect that anything this lying, flat earth, inept, so-called “Treasurer” (WTF??), will say or has said already! He is still convinced that the Labor surplus was way too high, compared to the actual surplus we now have it was almost a drop in the ocean! He, & the rest of his obscenely over-paid so-called “liberals” ( I use this term advisedly!) are all tarred with same stupid & lying brush, so what else could we expect? Hopefully this will be the last budget he delivers, & we can return to “normality” when the Labor lot win the next election? Well written & very understandable John!

  3. king1394

    The problem with running the country as if it was a household is that the analogy does not represent any sort of reality. Is this household a nuclear family, or double income, no kids, or a pensioner couple? Are they young , old, unskilled, well- educated? Well-paid and investing? Frugal? or Spendthrift? So many variations before you even try to work out differences related to home owner or renter? city or country?

    I really think that the household metaphor needs to join the man on the Clapham Omnibus who represented the rational everyman .

  4. Andreas Bimba

    Given the fiscal capacity of the federal government to deficit spend up to the limit of the availability of real resources without incurring any debt or ongoing inflation, any federal government that does not ensure full employment, adequate government services across the board and adequate funding support for state and local governments, is a failure.

    The neoliberals are incredibly stupid as federal government austerity and reducing deficits or even worse surpluses rather than limiting the size of government actually SHRINK THE PRIVATE SECTOR. This fact comes from an understanding of sectoral balances which is a key part of Modern Monetary Theory. Rather than leaving a debt burden to future generations, which is the standard neoliberal lie, they are leaving a smaller and weaker economy to future generations and hundreds of thousands of young people unemployed and under skilled at a time the average age of the Australian population is increasing.

    Excessive levels of private debt is also an inevitable outcome of federal government austerity as consumers seek to maintain existing living standards and as unproductive speculation in real estate and shares is incentivised by the current tax laws.

    When these speculative bubbles burst we will be plunged into recession.

    Further we do not need to lose our manufacturing sector by implementing free trade agreements as we had adequate trade access for our mineral, energy and bulk agricultural exports without these damaging agreements.

    All of our federal governments during the neoliberal era of the last forty years have been failures, including the Labor governments but the Conservative governments especially the Howard and Abbott/Turnbull governments have been abysmal failures.

  5. Alan Luchetti

    Trouble is, ALP and Greens also think the currency issuer is a currency user. And 99% of the media. Or if they know better, coming out with it is more than their job is worth.

  6. Harry

    Andreas: I agree with you completely. Successive federal governments have behaved more like state/local governments which, being currency users rather than issuers, are constrained to a significant degree by funding. Is it ignorance or is it deliberate deception?

    Certainly there are those who have a lot to gain by continuing the pretense that we have to “live within our financial means”. So they can ease up from time to time to ensure their political survival and then its rinse and repeat.

  7. Matters Not

    MMT has much to offer (I believe). The notion that a sovereign nation with a fiat currency can never default or go broke is politically compelling. Nevertheless, are there instances where sovereign governments with fiat currencies have defaulted or gone broke over recent decades? If so, then why? Did they not understand the theory?

    Presumably it’s not a difficult question. Or is it the case that none of the local experts bother to check? If not, then why not? What I do know is that MMT doesn’t resonate politically.

  8. Peter F

    When we are told that we are creating a debt burden for our descendants, I am reminded of the fact that the Sydney opera house cost $102M after being estimated to cost $7M. Todays equivalent is over $900M.

    Reconfiguring the interior is expected to cost $2B

    My point is that the costs become insignificant over time.

  9. Kronomex

    “Mr Morrison said the “growth curve” in welfare was trending downwards as a result of a stronger economy and good jobs growth, leaving fewer people on unemployment benefits.” Of course it’s going down, him and the rest of the LNP are making it more and more difficult for the little people to get any sort of benefits and help let alone survive.

    https://www.smh.com.au/politics/federal/more-than-tax-cuts-scott-morrison-plans-for-budget-savings-20180504-p4zdgg.html

    The whole thing is a sham from a bunch of nightsoil and snake oil salesmen and makes me feel ill. I would not be surprised if they try and tie the tax cuts for the lower clases in with the corporate pig trough cuts, you can’t/won’t have one without the other.

  10. Keith

    We no longer have a budget deficit crisis!

  11. Andreas Bimba

    Matters Not, Zimbabwe effectively became broke due to a contraction of production especially arising from the forced eviction of competent white farmers combined with excessive government spending which led to hyperinflation. A similar situation occurred in Germany after WW1 when the national government faced a shattered economy and deficit spent too freely.

    Argentina and Greece accumulated too much foreign debt in the form of $US or Euros which their central banks could not issue so these cases are not applicable.

    As long as the productive economy is healthy and federal government fiscal policy and a job guarantee is adjusted to maintain full employment and not spend beyond this point then inflation should not be a problem.

    MMT economists like Bill Mitchell have covered why the above economies have ‘failed’ and why optimal MMT policy settings would not result in this type of failure on many occasions on his blog.

    Note also that during the WW2 mobilisation in the US, their federal government ran deficits of up to 24% of GDP and inflation peaked at 12% before falling as productive capacity again caught up with demand. US GDP doubled over this period. So it is theoretically possible for the federal government to spend well beyond the full employment level by expanding automated production as long as the economy is sound and profitable demand for all production exists.

    MMT principles do operate in the world’s major economies but few national governments apply the insights that arise from a correct understanding of MMT principles in an optimal way. Japan and China appear to be the closest adherents of optimal MMT policy settings but so were the major Western powers during WW2 up to the mid 1970’s when national government fiscal capacity and economic development policy in general were harnessed to maintain close to full employment.

    Unfortunately the electorate has in general believed the false neoliberal narrative from both sides of politics, the mainstream mass media, the business lobby and most of academia of the last forty years.

  12. Matters Not

    Andreas, thanks for your response. Nevertheless some would argue that the list is much longer than that;

    The fact of the matter is that nations default incredibly frequently … There has been at least 13 major sovereign debt defaults since 1999 (Ecuador, Argentina, Russia, Ukraine, El Salvador, Peru, Pakistan, Moldova, Uruguay etc), and other smaller or less document cases. Most of these included foreign and domestic debt …

    MMT will cry out, but then “it’s voluntary”. Sticking to their “accounting realities”, they will say if a country can issue any amount of their own currency that they want, and they still default, well then that is simply voluntary; but if they didn’t want to, they wouldn’t have to

    More here. I found this article interesting. The author is sympathetic to the ‘technicalities’ of MMT but finds fault with some ‘practicalities’.

    http://www.the-lighthouse.net/debunking-modern-monetary-theory-mmt-understanding-it-first/

  13. John Kelly

    Matters Not, the only way a sovereign government that issues its own currency can go broke is if they borrow in a foreign currency.

  14. Harry

    MN:its a fair article but most of boils down to self-imposed restraints from a US perspective. Confining the discussion to Oz, there is little doubt that despite the illusion of independence of our RBA, it is in fact an arm of government. The government IS in charge though in this neoliberal era that fact is obscured, part of the smokescreens over the years. The federal “budget” is an illustration of this by its pretence that taxes fund most federal spending. That suits capital and its compliant bank and other mainstream economics who hate government intervention in the economy. Result: the economy is run for the benefit of the big end of town and all the rest of us are irrelevant.

    There is no inherent need to issue debt (bonds) to “fund” deficit spending. Once during the Costello years government the budget was in surplus for some time and much debt was paid back. Treasury proposed to cease issuing bonds but was lobbied by the corporate sector to continue the practice as they enjoyed a risk-free place to park money and receive a steady interest stream.

    Another fact: the federal budget has been in deficit about 75% of the time since Federation. Deficits are normal, not to be feared and are mostly needed to avoid high unemployment.

    And “debt clocks” are hyper-ventilating nonsense and distract from the real problem- high private debt, caused by federal policies.

    The sky should have fallen in long ago in Japan which has a debt to GDP ratio of over 200%.

  15. totaram

    John Kelly: ..or if they peg their own currency to a foreign one (which amounts to using a foreign currency but there are those who would not understand)

  16. Ross

    John Kelly,
    It seems to have become set in stone that the federal government must have a surplus.
    But no one has yet given a coherent explanation of why this must be the case.
    The last time of a surplus was Howard/Costello years and that left us the huge private debt of today.
    It’s about time that urban myth was demolished.

  17. John Kelly

    Ross, a surplus may be useful when the economy is booming and the private sector is flourishing, but overall, deficits are the norm.

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