I’ve been working on a project with UnionsNT strongertogethernt.com.au The last week has been foucsed on breaking down economic jargon and giving a decent analysis on the governments ‘budget’.
Anyone that has had some introduction to economics knows government budgets are not like households. MMT states the difference between a currency issuer and a currency user. The latter has to finance its expenditure while the former can always spend. That doesn’t mean it should always spend. Though its spending represents a socio-economic agenda.
MMT uses the sectoral balances as a tool to assess the context of the governmnets spending. The sectroal balances was developed by British post-keynesian economist Wynne Godley. The rule holds as a matter of accounting.
When assessing governmnet fiscal policy we need to look at whether spending in aggregate supports full employment and is meeting our desired social objectives. The image to the right shows the inflows (injections) into the private domestic sector and the outflows (leakages) that subtract from spending. Injections are Government Investment and Exports. Leakages are Taxes, Savings and Imports. If leakages are more than the injections the private domestic sector is in deficit.
A nation like Australia commonly runs current account deficits. This is our exports – imports. Imports are foriegners saving Australian dollars. When we purchase a good from say the USA a currency exchange needs to happen first. An Australian entity changes an $AUD for a $USD and then hands over the $USD to purchase the desired good. The $AUD is then accounted for in the US Federal Reserves account at the Reserve Bank of Australia. That is why imports are foreigners desire to save $AUD. The process in the real world is vastly more complex but this is a simple explanation of how foreigners end up saving $AUD.
Governmnet deficit spending is the Australian government spending more than it taxes. Australia on average runs current account deficits of between 3-4% of GDP. If we in the private domestic sector desire to save overall the government deficit spending has to be larger than the current account deficit. That is just accounting.
Governmnet spending plays a significant role within our economy. (pictured above) It is the largest injection into the private domestic sector. As an issuer of the currency, it has the power to maintain spending in aggregate sufficient with full employment. Government deficits aren’t relevant in terms of future governments ability to spend. However, entities like businesses and households have to finance their expenditure. The fiscal position of the private domestic sector matters. I have graphed the sectoral balances based on treasury projections in their budget papers for the next 4 years.
The solid coloured lines are the results of the various sectors. The dotted lines are treasury projections. Except for the current account (red line) years, 24/25 and 25/26, which I have assumed the long term aveargage of 3.5%. Treasury does not predict those years. The red line is positive because a current account deficit is savings of Australian dollars non-residents (see above). The government deficit (green line) is an injection to the private domestic sector (blue line). While the media focuses on the governments fiscal position, which is irrelevant in terms of its ability to spend, it neglects what is happening with the balance of the private domestic sector.
In this neoliberal era it is ‘normal’ for the private domestic sector to be in deficit as the government pursues surplus. This policy objective is unsustainable as it deprives the non-governmnet sector of its ability to save and destroys the net financial assets, leaving the sector financially poorer. We can analyse the domestic sector further between the distribution of wages and profits. Though because we run current account deficits the Australian government needs to deficit spend if we want the private domestic sector to save overall. That is not a theory, it is a matter of accounting.
I wrote a simple analysis of what is driving the inflationary pressures in the economy here. I’ll repeat the conclusion of what I said there.
Inflation is driven by price increases. Price increases are administered by those with enough power to raise prices. Take a simplistic economy where we have no new production. If corporations hike their prices by 6% and workers achieve a 6% wage increase there has been no change in the wage and profit share of the economy but prices have increased. What is currently happening is as production costs increase, those with enough power are able to pass on those costs.
What we are interested in is relativities between sectors. Inflation is redistributive. If someone is paying more, someone is receiving more. Our current inflation has nothing to do with wage rises or government spending. Our governments have enormous power (as currency issuers) to set domestic prices. It made childcare temporarily free over covid and we saw a fall in the consumer price index as a result of that decision.
Narratives that depoliticise current events that harm workers
Governments need to reduce deficit to save to build savings for the future.
This is one of the most recited points in relation to a governments budget. It is nonsensical. Savings are an act of forgoing current expenditure to spend at a later date. It does not apply to a currency issuer that can always spend. As shown above, as a matter of accounting, the government deficit equals the non-government sector income. We should question where it is spending and the distribution of that income but the notion it needs to save is irrelevant. It issues the currency!! Its fiscal policy should be determined as to whether it is meeting ouer desired socio-economic objectives and by how well the bottom of the income spectum are doing. Discussion around taxes should be around how we should redistrute income and wealth more fairly. A progressive position would be to tax unearned income (capital gains, rent, dividends et ceterea) at higher rate than waged labour. These are what we call economic rents and are extractive. The recipients of unearned income have not contributed to the output of that product and thus it is referred to as unearned income. i.e. They have not laboured to produce a good or service but still derive a financial benefit.
Global economic slowdown
Another reason citied is because of changing global economic ‘headwinds’. This is a term used in the budget papers. ‘Changing headwinds’ is a sailing terminology that refers to a turn in the weather for the worst. The current global circumstances of the war in the Ukraine has led to increased prices for
Petroleum refining and petroleum fuel manufacturing (+31.5%) due to a decrease in global crude oil supplies and increased demand in response to easing COVID19 restrictions. abs import price index – June 2022
That has now eased. The September import price index notes
The main offsetting contributor was:
Petroleum, petroleum products and related materials (-2.6%), reflecting an easing in global oil demand.
The increased prices for imported necessities has labour and capital fight over who should take the real income losses. The data shows for the trade price index Petroleum, petroleum products and related materials reflected an easing in global oil demand.
The current global slowdown does not change the domestic capacity of the local economy.
World gas prices are high because of Ukraine war.
The largest increases to prices for the trade price index – exports are
Through the year, the Export Price Index rose 25.9%. The main contributors were: Coal, coke and briquettes (+134.8%), and Gas, natural and manufactured (+98.6%)
These rises reflect a rising world spot price because of the war in the Ukraine. The gas companies are charging the domestic market world spot price which in the Consumer Price Index has led to an increase of Gas and other household fuels (+10.9%) for the September quarter 2022.
The Australian government could set a reservation policy and price cap for the domestic market of gas but it has chosen to allow the gas corporations to extort citizens. We are one of the worlds largest gas exporters. A government interested in getting inflation under control and mitigating against climate change would:
1. allow the expiration of long term gas contracts.
2. ban exports at the world spot price
3. mandate a domestic gas reservation and set a price cap.
Narratives on persistent inflation being something the government can not do much depoliticise falling real wages and blame ‘global’ factors outside our governments control.
The latest consumer price index notes
Strong price rises were seen across all food and non-food grocery products in the September quarter. These increases reflected a range of price pressures including supply chain disruptions, weather-related events, such as flooding, and increased transport and input costs. In the 12 months to the September quarter fruit and vegetables prices rose 16.2% and dairy products increased 12.1%.
While supply side constraints and severe weather is indeed a problem, what are we doing to mitigate against these types of disruptions (e.g. more locally based production, climate change mitigation) The government can target income to lower income households to ease cost of living pressures.
Interest rates need to rise to ‘tame’ inflation
The use of interest rates to control spending in aggregate is class warfare. The Reserve Banks role to maintain inflation within a particular range is a development that started from 1993
In September 1997 a speech Monetary Policy Regimes: Past and Future the then Governor gave an overview of the role of monetary policy.
The latest irritation of targeting an inflation band in the belief that rises in interest rates dampen demand holds no empirical evidence. We do not know the outcomes in aggregate as businesses pass on costs to service loans used to invest in capital equipment and borrowers are forced to pay more in interest. There is also the outgoing payments on the interest of government bonds that needs to be factored in.
The only way monetary policy would work to lower inflation is if enough people were to becoming unemployed and businesses would be forced to concede profit margins as they lost sales. Then because the current dynamic on inflation is driven by climate related weather disasters and unregulated gas prices – I doubt the current profit share for these corporations would decline.
The Marxist economist Pat Devine describes it as below.
The attribution of the cause of inflation to asocial abstractions like the money supply,-” or excess demand, obscures the social conflicts underlying the chronic inflation of modern capitalism. Thus, to say that inflation can be “”cured”” by curbing the rate of increase in the money supply is in fact merely the currently fashionable way of saying that state expenditure on the social services and welfare pro- grammes should be cut, or that private consumption should be held back by increasing taxes, or that unemployment should be allowed to increase until the workers come to their senses. Of course, if these things were possible there would be no problem of inflation to cure in the first place. It makes no sense to propose “”technical”‘ cures for inflation which depend for their implementation on the absence of the very socio-political pressures which cause the inflation they are supposed to cure; no sense, that is, except as a means of mystifying the nature of social reality and holding out the forlorn hope that it is possible to control inflation without fundamental changes in that reality.Inflation and Marxist Theory, Marxist Today, 1974, p.87
Our government is using a depoliticisation strategy and avoiding any discussion on policy that would help stabilise prices and bring about real wages growth.
The current fiscal policy settings will see a return of the private domestic sector in deficit. It is sold as a neccisitty and ‘good’ economic management. A lack of investment in climate change and rising unemployment is not my definition of ‘good’.
The war in the Ukraine and broader global economic factors are being used as cover to avoid having policy that stabilises current gas prices and the need to reduce government spending (aka surplus). The Australian government has the power to regulate gas prices. Meanwhile the faux progressives are out calling for taxes on ‘excessive’ profits. I am not sure how that would bring about price stability. These things would.
1. Allow the expiration of long term gas contracts.
2. Ban exports at the world spot price
3. Mandate a domestic gas reservation and set a price cap.
The government needs to stop working within the interest of gas corporations and control domestic prices. Further, slowdowns of growth in other countries do not affect the Australian governments ability to spend and invest in our domestic economy.
The paradigm of rate rises depoliticise policy to be the decision of ‘expert’ technocrats so our elected representatives can shift blame to unelected officials. Rate rises will do nothing to address currently inflationary pressures.
What we need now is targeted income payments to lower income households to assist with the rise to food prices resulting from climate related weather disasters.
The ALP is currently using a strategy of shifting blame to external factors it has no control over (or pretends it has no control over. i.e. interest rates) as it presides over the largest fall to real wages, and a dramatic drop in the wage share of national income, to their lowest levels in our history.