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The Myth of the Balanced Budget

Something will happen this week that will alert us to the reality of this government’s failures.

Despite all their rhetoric and their pathetic attempts to demonstrate their economic prowess, despite all attempts to gloss over their outright lies, their pretence at understanding economics, this week these champions of capital, of fiscal irresponsibility, will have the honour of taking our gross debt position beyond half a trillion dollars ($500,000,000,000).

Even in their eyes, this is a disaster for their credibility.

Check it out for yourself at the Australian Office of Financial Management. Surely we should celebrate this achievement with a public holiday. Or perhaps more appropriately with a fireworks display. More likely, those who believed their false claims should hang their heads in shame.

It is an unprecedented amount and double that which they inherited from Labor in 2013. Incredibly, they have done this in less than four years, compared with Labor’s six years of solid economic management that included a recession-saving stimulus after the GFC.

One Nation senator, Pauline Hanson was moved to remark, “At this rate we will never be able to pay it back,” she said. “We need to rein in our spending.” That is what we call an observation from ignorance. But let us not be too hard on her. There are 150 lower house members and 75 other senators who think the same way.

Some MP’s are calling for the reinstatement of the debt ceiling. You may remember former treasurer, Joe Hockey wanted to lift the debt ceiling to $500 billion back in 2013. In the end, the whole idea of a ceiling was abandoned following a deal the government did with the Greens.

A quick word of advice for Senator Hanson. No, we won’t be paying it back, not ever. The fact is, a currency-issuing nation can never run out of money, can never owe anything in its own currency, can always afford to buy whatever is for sale in its own currency, and indeed, has a responsibility to ensure all men and women seeking work, are able to find it.

If work cannot be found in private industry they should be employed by the state. As matters stand today, the government is failing in that responsibility because over 700,000 Australians are currently seeking work and cannot find it. That means we are not spending too much, we are spending too little.

The government’s reluctance to spend is consistent with their pursuit of what is, in their eyes, the Holy Grail; a balanced budget, one where spending equals taxation receipts. It is a grossly flawed objective.

To avoid the embarrassment of having to fess up to that failure, to provide work for its citizens, our treasurer Scott Morrison has found a very convenient loophole for his, and the nation’s, future. He calls it “good debt.”

His plan is to somehow separate value-adding “good” debt (infrastructure spending and the like), from the ever burdening “bad” debt (pensions, unemployment and sickness benefits etc), when preparing his next budget, in the hope that it will miraculously produce a balanced budget.

It’s actually a half good, half bad idea. The good half is that he recognises the value of infrastructure spending. The bad half is that he can’t see that welfare spending also puts money into the hands of people who spend it. Money spent on infrastructure is no different from money spent on welfare. It’s still spent!

What he can’t see, is that rather than spend on unemployment welfare, he could harness the idle resources of the unemployed in ways superior to welfare spending, thus raising the living standards of all Australians and in turn, benefit the nation as a whole.

He could give them a job. He could, by his own definition, so easily convert his “bad” debt into “good” debt, by eliminating unemployment benefits in favour of employing the unemployed and the underemployed in public works.

He could then confidently argue that because it is all good debt, there is no need to issue bonds. The money can be classified as “Overt Monetary Financing”, another way of saying, money created out of thin air. In doing so, he would have the so-called “balanced budget”, he so desperately wants.

A balanced budget is all just numbers in a computer. The trick is to have the numbers in the correct place. At the moment they are not, but they could be, so very easily.


18 comments

  1. Darian Zam

    I think you have again underestimated ‘real’ unemployment figures for those seeking full time work.

  2. wam

    It was disgusting to see this morning’s Today show autocue journalists displaying the debt with twirling 12 figure line of $s and they had a commentator calmy assessing worry at 7/10 when 4 years ago they supported the rabbott screaming CRISIS of 1/2 that debt and 1/3 deficit.
    WTF is labor doing?? Why can they not mention that LABOR’s AAA rating is still clinging on, despite the inept waste of billions by the LNP? Why can they not laugh at the inability of the rabbott to understand the economy because he believed his rants against gillard(ah there is the answer little billy is too frightened to mention her name)
    Well, bill, leave out gillard and swan and just go for the rabbott and his joey and throw in Robb and his job,
    The trumball was gagging to followtheresa and say enough is enough and he said it about electricity prices well bill there is some ammo there:
    Privatisation means chasing profit?
    The axing of carbon price(the diludbransimkims can be added for their voting with the rabbott who had knocked off trumball by voting for himself perhaps can he do it again on the same topic?)

    ps heard the racquet man say small business, big companies need help with power certainty. No mention of workers or pensioners. But who is surprised?

  3. havanaliedown

    Don’t take the twirling dollars so seriously. They need some colour and movement.

  4. wam

    Helvityni, my facebook was full of Today/Sunrise rubbishing Julia, everyday in 2010 till 2013 when billy finally dumped her for the lemon, allowing the LNP to scream economic incompetence which the boys do not think any different but they can see $500000000000
    If the channel 9 people were so effusive in their support of the rabbott why would billy not try to get them to acknowledge his panic reaction was deliberate and made him a liar??

    So I hope, almost a forlorn hope because I have little faith in the integrity of shorten and none in his advisers, that labor can shame the rabbott and the current cabinet on debt/deficit/climate.

  5. John Haly

    Our Deficit thinking?
    Finally someone calling the goal of seeking budget surplus/deficit for a sovereign country for the fraud it is. It was used as a tactic for manipulating the public’s ignorance of sovereign economics very successfully by Abbott and Hockey. Of course by the time Turnbull took office, the strategy changed to this good/bad debt deception as using Abbott’s fraud would reveal their inherent deceptiveness in the first place. The whole evaluation of an economy based on the accounting figure of a budget surplus/deficit is economic rationalism gone wrong.

    What about our unemployment, the gini coefficient, our excessive private debt, lack of housing affordability, low GDP growth rates, low wage growth rates compared to faster CPI growth, our farmer’s debt, our homelessness & poverty, our rising medical costs, our national spending, on inferior NBN infrastructure, our rising net foreign debt, our politician’s travel and pension perks way in excess of that provided for our own later retiring pensioners, our failure to address tax evasion, our trade deficit, our distribution imbalance between part-time & full-time jobs, our poor number of job vacancies, our utility price increases, decreased arts funding, diminished consumer & business confidence, our failing disability support, our DV legal aid decrease, our expensive education – for all age demographics, our dismantlement of environmental care, our falling family tax benefits, our diminished manufacturing base, our reduced public broadcasting funding, the affect on tourism as our reef’s coloured coral vanished, our poor renewable energy industry our reduced social security, and even the smaller number of tax agents to collect national revenue to aid a “budget recovery” we’re it even a legitimate measure. I could go on.

    But no! Our problems according to conservative media and political thinking will all be resolved the moment we can create a budget surplus. FFS Australia! Wake up!

  6. John Lord

    I like the ‘give them a job’ idea.

  7. Don A Kelly

    I believe that many people get the meaning of debt and deficit confused. Recently I asked a few of my mates at my local bowling club if they new how the “budget deficit” was calculated. I always believed that these people were smarter, but I was wrong. So I presume many in the electorate are similarly ignorant about something that is mentioned in the media almost everyday, particularly leading up to an election.
    This probably applies to many politicians, since I have always believed that a person doesn’t have to be particularly smart to be a politician.

  8. totaram

    “A balanced budget is all just numbers in a computer. The trick is to have the numbers in the correct place. At the moment they are not, but they could be, so easily.”

    Not only that John. They are the final result of what happens in the economy and that is “endogenous” to the economy. In other words, the “budget” is just a projection and the final result will depend on a large extent to what happens in the private domestic sector, which is only partially influenced by the treasurer. Further, as you have pointed out, having a “surplus”, divorced from other considerations is meaningless. In the present situation, where we have a current account deficit (export deficit) and huge private sector debt which is suppressing private investment, only govt. debt can lead to investment and growth of the economy. That has nothing to do with any theory. It is simple financial arithmetic. And govt. expenditure in providing jobs to the unemployed would be a great way to go.

    http://bilbo.economicoutlook.net/blog/?p=36071

    In fact, with private sector debt at over 150% pf GDP and families on the brink of mortgage stress, only bigger govt. deficits will ease the strain on those families. Again, simple arithmetic or algebra. No theories.

    Notice, the mainstream media and their commentators will never mention these simple algebraic relationships. Not even Greg Jericho in the Guardian, although I was pleased to see that comments BTL have taken this up and even one right-wing commenter took it up. Maybe people are catching on and there is hope. You cannot argue with arithmetic and algebra, although some will try by simply ignoring it!

  9. totaram

    Don A Kelly: Spot on! I keep repeating my concern that our civilisation is too complicated for Joe Average to comprehend it and the usual suspects with money can easily bamboozle him to vote against his own interests. To give you an example, I hold advanced tertiary degrees but not in finance or economics and until I retired and began to study these issues, I was as clueless as your friends in the bowling club. So it’s not really their fault. More worrying is the fact that they think that govt. debt is like private debt from some “bank” (maxed out the credit card) and it will need to be paid off eventually by our grandchildren. Complete rubbish, but so persuasive!

  10. Freethinker

    I guess ( I am not claim to be expert in economics) that when the debt in on the own country currency, when the bonds mature and the country have to pay them with the interests one of the solution is printing more money.
    However, and please correct me if I am wrong this will produce the seigniorage effect and the currency will lose value due to the increase of money supply.
    As a result the investors will not have the profit expected or not profit at all.
    As an example if the bonds have an interest of 7% and the currency value drop 12% the investor will lose.
    How many time the country can do that?

  11. totaram

    Freethinker: Your thinking is based on what used to happen when currencies were backed by gold. This thinking no longer applies, but the neoliberals would like us to keep thinking that it does. That is why they talk of “budget repair”, and “bringing the budget back to surplus”

    How do you think the current deficits are being financed? When old bonds mature, the govt. issues new bonds, and/or pays off the currency if someone demands it. Has the currency lost its value? Our debt has doubled. (lost value to whom? Locally? No way, inflation is at an all time low. Internationally? that depends only on how our trade is going and also how the rest of world sees our bonds compared to others e.g the US ones. There was a time our dollar was higher than the USD, but only because our bonds had a higher yield than the US bonds). Inflation has nothing to do with “money supply” (however defined) but more to do with whether spending in the economy is buying goods and services which are at their limits of production. Once demand exceeds supply prices increase. If production is drastically curtailed because of political and structural upheaval, as in Zimbabwe, inflation occurs.

    It’s not as simple as the neoliberal gold standard logic, once again. “Too much money” only occurs when there is too much demand. Just be aware that Japan has a govt. debt of 200% of GDP but has the Yen currency collapsed? No. The neoliberal economists have been saying it will collapse, and they tell us this every year since 20 years ago. They keep making excuses why it hasn’t happened, but refuse to acknowledge that their reasoning is faulty.

    Bank of Japan is in charge not the bond markets.

    http://bilbo.economicoutlook.net/blog/?p=34830

  12. Freethinker

    Thank you totaram for your reply and explanation.
    I was no much thinking in the gold backed currencies but as a value of one currency In this case the Australian dollar) against the USA dollar.
    This is because I am used to follow macroeconomics in some South American countries where the USA dollar is take as reference.

  13. Jai Ritter

    Thankyou john, you nailed it!!

    And can anyone explain what the money has actually been spent on by the coalition? It’s certainly not on much needed services in community.

  14. John Kelly

    Freethinker, interest on the bonds is paid twice yearly. The bondholders commercial bank account is credited by the RBA with newly created money in the same way that a commercial bank credits interest bearing accounts. This is not seigniorage. It is a simple commercial transaction. At maturity, the bondholder’s initial investment is credited back to their RBA savings account. The initial investment by the bold holder is not spent by the government. It stays in an account at the RBA and invariably, on maturity, the bondholder reinvests the money in the next bond issue. It’s no different from a term deposit. There is, therefore, no serious impact on the existing money supply. So why does the government issue bonds at all? It is a Reserve Bank mechanism used to control interest rates charged by the commercial banks. It is called the overnight rate where banks must ensure they have enough money to open their doors each morning. If the banks need extra money to meet their daily needs, the RBA will credit their reserve accounts and charge the overnight rate. The real threat to the money supply lies with the commercial banks lending too much money for the wrong reasons. This is what the RBA watches closely. Hope this helps.

  15. Kronomex

    Morrison’s wand from The IPA Dodgy Wand and Magic Accounting Shop has fizzled out. Again. To paraphrase, slightly, Galadriel: ““And some things that should not have been forgotten were lost. History became legend. Legend became myth. And for four years, so far, the balanced budget has passed out of all knowledge.””

    And in a dank cave Morralum strokes his budget and whispers to the dark, “The precious. My precious budget, who stoles my balanced…morralum…morralum. It was the Labor…morralum…”

  16. Freethinker

    Thank you John Kelly, I appreciate your explanation.

  17. Win jeavons

    Good debt, bad debt ? It would seem that spending on roads, railways is good , but on human flourishing is bad! If too many people are sick or destitute, what use the shiny new infrastructure ?

  18. Pingback: The Myth of the Balanced Budget | THE VIEW FROM MY GARDEN

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