It is custom in Australia to make an event around the various state/territory and federal budgets. In the past achieving some fiscal ratio has been seen as ‘responsible’ In 2016 Economics professor Ross Garnaut stated (source)
“These measures should be backed by moderate and gradual cuts in spending, and moderate and gradual tax increases to repair the budget.“
Post COVID, the framing when discussing a budget, has moved from achieving a fiscal outcome (balanced/surplus) to targeting a particular employment rate within a framework called the ‘natural accelerating inflation rate of unemployment’ (NAIRU)
I wrote a little more on this in my post The Mainstream are Trying to Stay Relevant and Modern Monetary Theory and The Job Guarantee. I have rejected the NAIRU as a nonsense concept. It effectively uses the unemployed to discipline the rate of inflation, to which you can use a ‘buffer stock of employed’ to achieve the same end.
As a society we literally leave masses unemployed because economists believe unemployment must not fall below this NAIRU rate. Costs of unemployment are huge:
- loss of current output
- social exclusion and the loss of freedom
- skill loss
- psychological harm, including increased suicide rate;
- ill health and reduced life expectancy
- loss of motivation
- the undermining of human relations and family life;
- racial and gender inequality
- loss of social values and responsibility.
Even ‘the left’ have changed the framing for how they think about governments fiscal positions.
In 2019 the ACTU was concerned with excessive debt levels. I wrote a critique Solving inequality requires getting macro right!
“Globally most respected economic institutions believe the risk of recession has increased and some pundits fear “winter is coming”.……Stimulus measures by the Chinese authorities will exacerbate already excessive debt levels and add to vulnerabilities“
The report continued to discuss Australia and the ‘limited’ tools in response to the ‘economic challenges’ we face.
“Economic fear is mounting and because of very high debt levels and limited scope for expansive monetary policy governments have limited tools in responding to these challenges“
Post COVID ‘we are no longer discussing ‘fiscal repair’ and the treasurer wants an unemployment rate ‘comfortably under 6 percent’ (source) Further articles are stating the unemployment rate could’ve been much lower with headlines like ‘Reserve Bank and Treasury admit ‘full employment’ is not what they thought it was. And it’s held the country back’
Although the NAIRU framing is still incorrect. And the left still talk about currency issuing governments as ‘borrowing’ to invest!
The ACTU report on the upcoming federal budget still says
“The government has ample fiscal capacity to manage those deficits moving forward, thanks to record-low interest rates and the actions of the Reserve Bank (whose bond purchase program has supported low interest rates and facilitated the government’s fiscal response to the pandemic).“
…For a Stronger, Balanced and Inclusive Recovery, April 2021, p36-37
“Borrowing to finance long-lived, productive investments is the exact same rationale that leads other parts of our economy – notably businesses and households – to also take on debt.”
The report suffers as a result of that illogic. The Federal Government issues the Australian dollar. It must spend first (that is logic101). It is nothing like a household or business that must borrow to finance expenditure in excess of what it earns. The fiscal position is residual. It needs to satisfy the savings desires of the non-government sector if we desire full employment (more jobs advertised than demanded)
I gather that I am a nobody but when I was discussing modern monetary theory with ‘progressive’ institutes such as the Australia Institute (affiliated to the organisation that helped prepare the ACTU report) or PerCapita, I would cop hostility from people within those institutes for articulating
- Government debt was an after the fact operation and a tool of monetary policy (interest rates) (there is no need to issue it) It doesn’t fund a currency issuing governments ability to spend.
- The unemployment rate is a political choice; Governments can always purchase idle labour. They issue the currency and;
- A Job Guarantee is a replacement of the NAIRU framework
I have been called ‘simplistic and naive’ and accused of being ‘anti-tax’ because I stress the purpose of taxation (or bonds) are not a funding mechanism. Which I wrote about here and in various other places throughout this blog.
I have some people write to me now asking for further explanation and I can direct them to appropriate sources. The blog is not intended as an education resource but to document my own understandings of macroeconomics and the impacts how a flawed framework leaves us materially poorer as a society.
I recently attended a Northern Territory budget briefing with Treasury officials. I was disappointed to the whole approach that the government was taking to the budget. The reality is the NT Government is a currency user (the largest source of its revenue being the GST)
Though the framework it is taking to the budget process and the policies of wage freezes and cuts too spending will ensure the most vulnerable in our society suffer.
The spending measures taken in the budget are aimed at subsidising private investment (tourist vouchers, local jobs fund) and not at direct job creation. The public sector has a wages freeze and staffing caps.
Budget paper two says (source)
The 2021‐22 Budget includes investment aimed at accelerating economic recovery through a $120 million expansion of the Local Jobs Fund and additional funding to support growth and development of new and existing industries recommended by the Territory Economic Reconstruction Commission.
When I pressed the treasury officials for more detail on that programs, they were described as measures that subsidised businesses to employ people. When I asked why there were no direct job creation programs the answer was because The Government doesn’t want to do that and that they were more interested in subsidising private investment.
I prodded with further questions on debt, the RBAs Quantitative Easing program (which means the states/territories owe dollars to the RBA) and the inadequacy of relying on a consumption tax to fund the majority of our public expenditure. Treasury agreed the GST was not fit for purpose though insisted the largest priority must be getting rid of public debt (according to treasury that means wage freezes, staffing caps and subsidies to private business)
The GST is a consumption tax (at a federal level) that then is hypothecated amongst the states/territories. It is a terrible way to determine funding to these jurisdictions who are required to have the revenues to deliver healthcare and educational systems because of the structure of how we are federated and the responsibilities within the constitution. States and Territories have the responsibility for those services while the federal government issues the currency.
By using a consumption tax to hypothecate the revenue allocated that is then used to deliver the above services is what requires the states/territories to issue bonds (and thus make interest payments)
If the non-government sector desires to save more and thus reduce consumption then the collection of GST falls (relative to GDP) and the states/territories have less to spend and either need to make up the shortfall by issuing bonds or raising taxes.
The states don’t have the power to impose income taxes and they’ve been reliant on increasing stamp duties and in some cases payroll taxes. (Two taxes that are not efficient and are not achieving much in terms of socioeconomic outcomes)
Discussion of government budgets has moved to needing to spend more but are still within a framework that Governments must tax, borrow or print in order to spend. At a federal level that is false. In terms of the states/territories we need to be questioning just how fit for purpose the funding mechanisms to deliver public services are.
While it is pleasing to see the public discourse move to discussing employment levels this is still operating under a NAIRU framework. A mythical number that is not known by anybody. This has been the definition used for full employment for the past 40 or so years and any progressive should reject it.
Full employment is a society as one in which there are more jobs on offer than people seeking them, so that work providing a secure dignified existence may be easily obtained by all.(Beveridge, 1944, Full Employment in a Free Society)