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Perplexing percentages

(WARNING: For those who find percentages confusing, this may not be the article for you)

As I listened to Scott Morrison and Matthias Cormann say “Jobs and growth” 579 times, I drifted off, thinking about the bigger picture rather than the tinkering at the edges that was announced today.

Sticking with the line that we do not have a revenue problem is a Herculean task in light of the figures but Scott assures us that any shortfall will apparently be fixed by growing the economy.

To fix the deficit, we must cut spending he says, with a goal of decreasing expenditure from 25.9% of GDP in 2015-16 to 25.3% of GDP in 2018-19. To help achieve that, the increase in expenditure each year has been cut from 2% to 1.8%.

And this is where I started thinking, if expenditure is growing at a slower rate than GDP, why do we need to make cuts to achieve Scott’s 25.3% – won’t that happen all by itself?

So I did the maths – and this is the part you may want to skip.

If current expenditure of 25.9% goes up by 1.8% each year it gets to (25.9×1.0183) 27.3% by 2018-19.

At the same time, GDP is projected to increase to (1.0275×1.03×1.03) 109% of today’s GDP.

That means expenditure in 2018-19 will be (27.3/109×100) 25% of GDP, which is lower than Scott’s projected 25.3%, without having to make any further changes.

If growth can fix the revenue problem without us having to increase taxation, then it will also fix the spending as a percentage of that increased GDP without us having to do any cutting.

 

 

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  1. Glenn K

    nailed it in one Kaye! Has been an obvious point for a long time but the MSM never ask the question, and if the opposition did aks the question then the MSM headlines would scream OPPOSITION PROPOSE TO DO NOTHING.

    It’s a smokescreen anyways, all this discussion around expenditure as a percentage of GDP. A smokescreen to cover incompetency by the politicians who do not understand economics and a smokescreen to cover the real agenda of stripping by the social safety net.

  2. Chris

    I guess it’s a case of greed, cruelty and rubbery figures. Who would expect anything less from these people ?

  3. flohri1754

    Amazing, isn’t it? Much like the same argument used to scare people about the rise in the cost of health care …. in 2030, or 2040 or 2050 it will be at such and such a point. With reference only usually ever being made to today’s revenue level. With increasing population comes increasing health costs, and, supposedly also increased revenue for the bottom line. What this country needs is an adult, calm government …. rather than smoke and mirrors and slogans and blind ideology. Sheeez …….

  4. David

    Once again the ignorance of matters economic is revealed by your article Kaye as we suffer the complete inability of these two pretenders to come to grips with the revenue problem, we do not have.

    However it enables these junior snake oil salesmen to play their games, banking on the intolerance of the majority of Australians for lists of figures and attempted fudged explanations with meaningless slogans, to simple shut off, as if they never heard a word, and life under the lying Torys is all good.

    Suits the Tory game plan down to the proverbial T. As for the media, they are all wearing dark glasses, blinded by the brilliance of the chief snake oil salesman’s phony smile, their lives made so much easier writing soft as falling petals bullshit, in praise of their equally expert bullshitting hero.

    What a phony fool Turnbull is. Abbott will be delighted at such an easy target, as his troops lure the PM him into a cosy state of fantasy.

  5. Kaye Lee

    Cuts to public spending and proposed hikes in the GST are not being made to fix the budget or to improve living standards for the Australians that Scott Morrison so glibly referenced today, telling us that we all agree with him.

    They will be used to fund cuts to company tax rates which, at 30%, is lower than anyone earning over $37,000 a year is paying, and is 5% lower than the company tax rate in the US (35%). If you make company tax rates much lower than the highest personal tax rate, people just become companies. And realistically, what difference if it is 30% or 25% – they are still hiding money in tax havens where they pay 0%.

    It’s amazing that it is too hard to match data to catch corporate tax cheats but we are going to save $1.1 billion by matching data on welfare recipients. This is, of course, less than the $1.8 billion we would have saved by stopping people from fraudulently claiming business usage on cars, a move the Coalition scrapped to “save the car industry”.

  6. cowper133

    Every time Morrison opens his mouth he demonstrates how unsuitable he is for the job. As for Cormann, full marks for waffle that tells us little. The MSM has become so apathetic and so obviously incompetent in this space that it verges on the ridiculous. Thank heavens we still have a few good journos writing articles, for the TV & radio interviewers who are probably influencing farmore voters, are letting down the community!

  7. Terry2

    Kaye

    I remember Barnaby Joyce in 2011 trying to create alarm in the community by his oft repeated claim that the then Labor government was borrowing $100 million a day just to pay public servants’ wages.

    I could never fathom his math, do you know how the situation on borrowing pans out now ?

  8. Lee

    See Scotty… this is why you shouldn’t cut funding to education.

  9. John Hermann

    Yes Glenn K, we have a government and an opposition who both fail to understand simple macroeconomics principles, The federal government budget deficit does not need to be “fixed” or “repaired”, there is no “budget emergency”, and we do no need “budget savings measures”. The simple fact is that a government budget deficit equals a private sector surplus. In order to enhance private sector savings, increase the overall level of employment, increase aggregate demand and grow the economy, we clearly need more government spending, not less. For a monetarily sovereign government, the budget deficit – being the difference between spending and tax revenues – can be funded without any risk of inflationary pressures or of increasing interest rates, in circumstances where the economy is operating well below its capacity to produce goods and services.

  10. Kaye Lee

    Australian government securities on issue as of today (Gross debt) $398.188 billion

    Net debt expected to peak in 2017-18 at $346 billion, up from about $180 billion when they took office.

  11. Matters Not

    The Government has also increased the funding allocated for the establishment of the National Wind Farm Commissioner and the Independent Scientific Committee on Wind Turbines, up $600,000 over four years to a total of $2.5 million.

    That Independent Scientific Committee on Wind Turbines is hilarious. Just imagine what ‘business’ they would conduct. perhaps re read the evidence that they are not harmful.

    The select committee, led by anti-wind power crossbenchers David Leyonhjelm, John Madigan and Bob Day, delivered its report on Monday, three days after its draft findings were published in News Corp.

    The Clean Energy Council said the leak showed the inquiry was “a biased political stitch-up by a small group of senators opposed to the cheapest forms of renewable energy”.

    http://www.smh.com.au/federal-politics/political-news/investigation-into-wind-farm-leak-evaporates-into-thin-air-along-with-senate-committee-20150804-gir39d.html

    Now that’s a waste. The cost of ‘deals’. And Leyonhjelm talks about the ‘nanny state’.

  12. John Hermann

    It should be recognised that federal deficit spending adds liquidity to the economy, and supports the saving, investing and productive capabilities of the private sector. Secondly, at a time of economic contraction, much of that deficit spending is structural, not discretionary. Thirdly, to cut back on deficit spending in such a scenario is tantamount to applying a wrecking ball to the economy — the opposite of what is required if one desires to have an expanding economy.

  13. Kaye Lee

    Cuts to public spending will also be used to insure the risk that venture capitalists take when investing in startups.

    I am reminded of the $10 million that Turnbull gave to Murdoch’s nephew, who happened to be a donor to Malcolm’s fundraising machine the Wentworth Forum, for some crazy rain-making scheme.

    http://www.abc.net.au/news/2007-11-20/turnbull-pumps-10m-into-rainmaking-gamble/731004

    What they fail to realise is that, if people other than entrepreneurs and venture capitalists don’t have spare money due to stagnant wages, unaffordable housing, and a possible GST hike, then many startups will fail. A good product or idea means nothing without a market. Everything this government does is designed to help business which would be ok if they didn’t do it by stripping money from their customers.

  14. Miriam English

    John Hermann, could you provide some links to the things you are talking about, please. I don’t understand and I would like to learn about it.

    (This is a genuine request. I just re-read what I wrote and it sounded a bit like I was having a go at you.)

  15. Miriam English

    So very true, Kaye. This government is so blinded by ideology that they can’t seem to see that business will get no benefit from all this if their customers have no money to buy what they’re selling.

    I spend very little in a week, yet I’m finding it such a struggle I’m having to reduce my spending. What is happening in a more normal household? Businesses are going to have a tough time of it when this government gets finished hurting their customers.

  16. andreas

    Wake up to it, folks: The adults are in charge!
    These clowns will appear terribly busy shifting the Titanic’s deck chairs before darting for the last life boat!

  17. Klaus

    Absolutely brilliant. And you know what, Kaye is right 🙂

  18. Klaus

    Hi Kaye, I don’t believe that Mob is looking for a market in Australia. No, the riches are in the US, China, etc. I see a world coming where, by a stroke of luck and Australian genius, startups get lucky and bingo, they carry their Ideas and know how to the US where the money can be miraculously multiplied by ten. And of course, that’s where they will pay their taxes. In the meantime, the failed startups are left for the plebs to clean up. Brilliant scheme.

  19. cmshowell

    Miriam, this is one of the ideas embedded in Modern Monetary Theory. The surpluses and deficits in the government sector, the non government sector, and the external sector (basically balance of trade) are always in balance, and sum to zero. If the non-government sector has wound back its activity, it’s sensible to use government spending to keep the economy going (think family payments, pink batts and school halls as a response to the GFC).

    There’s a lot to read. You could start out with Wikipedia:

    https://en.m.wikipedia.org/wiki/Modern_Monetary_Theory

    have a look at New Economic Perspectives:

    Modern Monetary Theory – An Introduction: Part 1

    and then check out our own living national treasure Bill Mitchell:

    How to discuss Modern Monetary Theory

    Bill even has an interview on YouTube:

    Happy reading!

  20. John Hermann

    Hi Miriam,

    Thanks for your query. I support what cmshowell has written above, and recommend looking up the references provided there. Modern Monetary Theory has growing support from a range of heterodox economists, and challenges the point of view offered by the neoclassical and new-Keynesian economists, who seem to be mostly driven by neoliberal ideology. If you contact me via my email address – hermann@chariot.net.au – then I will be happy to forward further information.

  21. Miriam English

    cmshowell, thank you muchly. Exactly the sort of resources I was looking for.
    Now I’ll do my very best to understand it. 🙂

  22. Miriam English

    Thanks John Hermann. I’ll get in touch with you soon, after I consume all this info cmshowell has so kindly provided. I appreciate the offer of help.

  23. Bacchus

    Miriam

    This lecture by Steven Hail has had many airings here on the AIMN – that’s because he has a way of putting the concepts of MMT into an easily digestible form:

    Well worth spending the hour it takes to watch.

  24. Wally

    Kaye Lee

    “Net debt expected to peak in 2017-18 at $346 billion, up from about $180 billion when they took office.”

    If we asked Scott Morrison about debt created by the LNP government he would reply with something to the effect that 55.5% of the debt was created by the Labor government and the MSM would gobble that up as being the gospel. Fact is our debt is expected to increase by 92% over 3 years, that is nearly double what it was and our economy is stuffed.

    I am certain the main reason the LNP continue to cut expenditure on education is to ensure Australia’s society remains dumb enough to continue voting for the LNP.

  25. kizhmet

    My thanks to those posting information/links on MMT. Like Miriam, I really need to get my head around concepts that appear to make sense ‘-) Kaye – brilliant as usual.

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