So the drop was delivered to the dailies, ahead of a Prime Ministerial speech that, in effect, is now redundant: tax revenue has been written down by a further $12 billion.
Labor’s surplus will now most likely only be found at the end of the “forward estimates” on budget night, and possibly not even then.
Shadow treasurer Joe Hockey continues to blame the government’s profligate spending. According to the mid-year economic and fiscal outlook, spending this year will be 23.8% of GDP; it is said to be tracking a little below that. In the last Howard budget, it was 23.1% of GDP, the lowest that government ever managed, having hit 25% in the early part of last decade. More to the point, that 23.8% compares with 25.3% the previous year. That 25.3% is padded with extra spending brought forward from 2012-13, but Labor is still engaged in a significant fiscal contraction, worth 1.5% of GDP.
With both sides having reduced the economic debate to an argument over the size of their respective surpluses in recent years, our politicians are now stuck with having to discuss fiscal policy like vaguely intelligent people rather than two yobbos down the pub. Nuanced, hard-to-explain concepts like nominal GDP have been spotted in the wild for the first time. But try explaining to punters why persistently low inflation can actually be a problem, especially when you’re still telling them that in fact they’re doing it tough because of the “cost of living pressures”. And why the high dollar is a problem when they are buying imported cars in record numbers and travelling overseas is regarded as a right, not a luxury.
There will, however, continue to be commentators and economists who insist that, notwithstanding Treasurer Wayne Swan ripping 1.5% of spending out of the budget, there’s nothing wrong with the budget that some more savage spending cuts won’t fix.
So, two examples from overseas for the austeristas to consider.
The US Fed meets Tuesday and Wednesday this week and won’t change its huge spending program one jot because the US economy has, according to recent data, stumbled. The Fed had been expected to start outlining plans to slow spending ahead of its self-imposed 2014 deadline, but the slowdown in activity has changed that. The first estimate for March quarter growth from the US showed that GDP jumped to an annualised 2.5% rate in the quarter (the figure will be revised twice in the next two months) from just 0.4% in the December quarter, but it could have been up to 0.7% higher according to some estimates if not for another negative contribution from weak US government spending.
That lower spending by governments hardly contained any impact from the early part of the $US85 billion “sequestration” cuts to the federal budget. They started to be felt last week by US air travellers, who were thrown into chaos by regulators trimming spending on air traffic controllers. Those cuts were quickly repaired on Friday with emergency bills to authorise more spending to keep air traffic control services operating normally. The fiscal discipline of the Tea Partiers and austeristas of the Republican Right went missing in the face of a potential voter backlash.
In fact, cuts in overall government spending have reduced US economic growth in 11 of the last 13 quarters, and cuts to federal speeding have been a drag in eight of the last 10 quarters. US economists reckon that after the impact of around 0.7% in the March quarter, the sequestration cuts will trim GDP growth by around 0.6% over the remainder of 2013. That means US growth could have been closer to 4% for the full year than the new 2 to 3% forecast in the wake of Friday’s report. And that in turns means lower jobs growth and continuing weak revenues.
Across the Atlantic, the European Central Bank meets Thursday night and is expected to cut its key interest rate by 0.25 percentage points in a (very) belated acknowledgement that the eurozone is sliding deeper into recession, dragging the growth pillar, Germany with it.
But bizarrely, German Chancellor Angela Merkel and her government still see the need for spending cuts, not increases. That’s despite confirmation last week from two German industrial giants, Daimler-Benz and Volkswagen, that the previously solid car sector was now facing plunging demand across the continent (including at home) and in the strong Asian markets.
Merkel said last week that if anything German interest rates would now be rising if the country had an independent monetary policy — a comment that was as far from the reality of the German economy and the rest of the eurozone as anything she has said in recent years. Those strange comments (supported by a host of government ministers, German economists and the Bundesbank) were seen as a warning to the European Central Bank not to cut interest rates.
But that cut, if it happens, will have little or no impact on economic activity because bank lending remains depressed across the continent and despite being bailed out by the ECB, banks are still not boosting lending to businesses large and small.
It will, however, support the Australian dollar around the $US1.03 level, which is still far too high for the current fundamentals in the Australian economy and will help guarantee that, whoever frames MYEFO at the end of the year and the 2014-15 budget, our budget problems aren’t the easy “slash spending” fix some will have us believe.
The primary problem is the state of the trade exposed domestic economy which is dire and has been so for over a year. The lack of profits has now reduced tax receipts which is why the government has finally noticed. Fix the economy, primarily by lowering interest rates so the dollar returns to a reasonable value and, hey presto!; structural deficit fixed! People might even go for a holiday in Tasmania to celebrate, although that could be going too far.
Wouldn’t the Coalition simply fall back on the line that it’ll take time to repair the Labor “black hole”, as it did so effectively between 1996 and about 2004? During that period, Labor did nothing to dispute their arguments and probably will behave similarly if defeated in September. Then, when global conditions improve, which they eventually will, the Coalition will take full responsibility, as they did last time. A tried and tested approach.
“Austerity Abbott” is running for cover. But the true intentions of a new Abbott government are revealed by Michael Stutchberry (I know so much about economics, I could be forgiven for being smug) who has joined his former colleagues from the OZ and the Goebbles rag for Western Sydney in demanding spending cuts. To ape Bill Clinton, the clever cry was “It’s the spending stupid!”
What is really worrying about Australian economic thought is that, apart from some practical economists, the profession still has not realised that 1) neo-classical general equilibrium economics does not explain anything because it is based on assumptions that cannot be true or even approximately true. 2)There are counterexamples to the suggestion that outcomes will be closer to the “ideal” results of a neoclassical general equilibrium, the closer to this ideal that policy makers try to make the economy. It just is not “second best” to try to get close to what pure theory tells you about a fictional market economy that is complete, perfectly competitive, and in which all participants have perfect information about goods and technologies.
There is therefore no basis whatever for the assumption that an economy in which less tax is paid is more efficient than an economy in which more tax is paid. There is no basis for the view that it is better to give as much as possible to individuals (especially extremely wealthy or overseas investors) to spend as they see fit when vast amounts of money need to be spent on infrastructure, so that places like Western Sydney do not place huge burdens on people who live there with pollution, travel times, costs from tolls etc, which could be removed if only people realised: “It’s taxes that are too low stupid!”
Will this be heard? Not a bit. Our MSM has seen how low taxing governments have in the past given such a huge share of national income to profits and hope that austerity will deliver a bigger share to profit, more unemployment and a pliable workforce, afraid to lose their jobs. Some of these experts know this is what is wanted but will still pretend that their theory, which says that people cannot be afraid to lose their jobs, is correct.
What will save us? We really need alternatives to MSM, so that people can discover information that our MSM “gatekeepers” want to keep from them, because they have such a better view of reality.
Maybe the underlying problem is economies being too reliant on government spending? If this is true, the implication is that any reduction that spending sends the economy spiralling downward. Since the downward spiral (AKA recession or even depression) is what everyone fears the most, governments are constrained (through their own fear) from doing things that really need doing. Election campaigns then become about who has the most elaborate window dressing, dipping into other jurisdictions (like state education) and non-economic topics.
12 billion dollars – it is time for heads to roll – bring on the election