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Fantasy budget

May 6th, 2013

Crikey asked me to write 1000 words or so on my ideal budget. I didn’t respond exactly in those terms, looking instead at the strategy for the medium term. Crikey ran it today, and I’m doing the same (over the page).

The first point to make about the Budget is that our fiscal position is, rightly, the envy of the world. This is primarily the result of an unprecedented period of economic expansion which began in 1990, when the economy was at the low point of the ‘recession we had to have’. Primary credit for this outcome must go to the Reserve Bank, which made a series of good calls in the 1990s and the early 2000s, and to the Rudd government for the rapid shift from ‘fiscal conservatism’ to Keynesian stimulus after the 2008 financial crisis. This was made easier by the strong growth in minerals demand from China, and the fact that China also implemented a massive stimulus in early 2009.

The Howard-Costello government deserves at least muted praise for not making a mess of this. Howard and Costello kept the budget in balance or just enough above to report a string of small surpluses, and they did not interfere with the Reserve Bank. In their final years of the pre-crisis boom, However, they made a string of decisions that ensured the budget would be in structural deficit once more normal conditions returned.

The 2009-10 budget, along with the emergency measures taken earlier, protected Australia from the impact of the global crisis. By contrast, New Zealand, now being praised by everyone on the political right for returning rapidly to surplus, experienced a recession, pushing it yet further behind Australia in income per person.

At the time of the 2009-10 Budget, the government projected a return to surplus by 2015-16. On the basis of some good news that turned out to be illusory, the target was later moved forward to this year, and turned into an ironclad commitment, which was only abandoned a few months ago. It now appears likely that the deficit will be around $12 billion or 1 per cent of GDP, which is about where it should be.

It follows that there’s no need, in terms of fiscal policy, for any radical change in strategy. If the economy slows further, the automatic stabilizers inherent in the tax welfare system will produce a somewhat larger deficit. If strong growth returns, the original surplus target should be reached.

The big question for this year’s budget is that of the long term levels of public expenditure and taxation. With the announcement, and apparent bipartisan acceptance, of a 0.5 per cent levy to provide partial funding for the National Disability Insurance Scheme, we have finally broken the longstanding taboo on increasing taxation. We can therefore address the central question of fiscal policy: should we pay more tax, and get improved services in areas like health and education, or should we pay less and get less?

The case for paying more and getting more is based on the fact that technological change has reduced the cost of most physical goods relative to ‘human services’ which require skilled labour for their delivery. At the same time, increasing longevity and the disappearance of unskilled jobs have increased the importance of health and education.

Over the next decade or so, addressing unmet needs in human services is likely to require an additional 3 to 5 per cent of GDP*, or around $40 billion to $65 billion a year. It’s worth considering a few options.

Thanks to the dominance of tax-cutting dogma over recent decades, there’s no shortage of options to raise significant additional revenue. The first would be to scale back the tax cuts for high-income earners originally proposed by Howard in 2007 and adopted, in large measure by Rudd. Increasing the top marginal rate of tax to 50 per cent, and applying it to income over $150 000 would recapture only a small part of the increased share of income that has gone to those in the top 1 or 2 per cent of the income distribution. Nevertheless, it would be sufficient to raise close to 1 per cent of GDP per year over the next few years.

Then, there’s a laundry list of concessions and tax expenditures such as the the Seniors Tax Offset and the abolition of income tax on super fund earnings paid to people over 60. Together with the earlier decisions to halve the rate of capital gains tax and end the indexation of petrol tax excise, Saul Eslake lists these as ‘the dumbest tax decisions of the last 20 years’. Again, it would not be hard to find 1 per cent of GDP here.

Given the continued pressure on the States to contribute to the financing of Commonwealth initiatives, and the fact that so much of their own-source revenue depends on inefficient, distorting and regressive taxes like stamp duties and gambling tax, State revenue also needs attention. While the states could do better than they have with payroll and land tax, the only serious option is under the control of the Commonwealth – an increase in the rate of GST, say to 12.5 per cent, which would raise an additional 1 per cent of GDP.

Even in my dream budget, I would not introduce these measures all at once. For the moment, the macroeconomic situation does not require further tightening of fiscal policy. But in the long run, these are the kinds of measures that will be needed.

* GDP is the wrong number to use here. The best estimated of the base for taxation available to the Australian government is NDI (Net Domestic Income). But the habit of referring exclusively to GDP is so ingrained that correcting it seems pointless.

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  1. Garry Claridge
    May 6th, 2013 at 17:02 | #1

    What is the forecast deficit in relation to NDI?

  2. Sam
    May 6th, 2013 at 18:40 | #2

    If it’s a fantasy budget and not constrained by parliamentary realities, why not just increase the carbon tax?

  3. Ikonoclast
    May 6th, 2013 at 18:49 | #3

    There is much to agree with in your analysis Prof. J.Q but there are also some key points where you are quite wrong and misconceive the macroeconomic task.

    The statement “our fiscal position is, rightly, the envy of the world.” gives rather too much weight to the importance of fiscal positions and also, in context, too much emphasis on the inherent “goodness” or efficaciousness of surplus or balanced budgets regardless of other economic indicators. At the same time it gives too little emphasis to real positions. Real positions include things like an employment rate of 5.6%, a labour force underutilisation rate of about 10.5% on some measures and a youth unemployment rate of at least 11.5%. Real positions also include factors like the abysmal provision of communications infrastructure in this country with Australia slipping to 40th place on global rankings. (Link provided in my latest post on Moday message baord).

    In what sense is a surplus meaningful and useful if aggregate demand does not require to be damped? In what sense does it make sense for a nation with a fiat currency to save in its own currency? A sovereign wealth fund for example is one form of a nation saving in its own currency. These monies (of which a portion were for a time invested in the tobacco industry of all things) would have been better left untaxed (allowing private investment and consumption decisions) or if taxed better invested on needed national infrastucture. To ever carry a surplus for purpuses other than damping overheated demand and to “save” it rather than invest it in needed national infrastructure is an absurdity. The “saving” of it in a sovereign fund from whence it is invested to create asset inflation is another self-defeating absurdity is inflation fighting / demand damping was the rationale of the surplus in the first place. Investing overseas is taking an unnecessary sovereign risk and enduring the opportunity cost (if that is the right term in this context) of failing to invest in needed infrastructure at home.

    Whence comes this budget outcome fetish where all that seems to matter is a balanced budget or surplus budget seemignly regardless of other outcomes? Why do not real outcomes matter? If they matter, why not mention them? You refer to tax cutting dogma. It’s a pity you don’t refer to budget surplus dogma, puncture its absurdities and put it in its proper place. The only reason not to deficit spend to the level sufficient to remove all unemployment other than structural unemployment and sufficient to provide all necessary and desirable infrastructure would be the point where an inflationary spiral shows signs of starting up. But now of course as well as the surplus fetish we have an inappropriate and out-of-synch inflation phobia still controlling our actions in a still very weak part of the economic cycle.

    Why don’t the big ticket items of negative gearing, trust abuses, corporate welfare and the full slew of fossil fuel subsdies get a mention on your laundry list of concessions and tax expenditures that need reform? I agree on the items you do mention and maybe a quick 1000 words means you unavoidably missed things.

    Ultimately though (and I would say this too to MMT proponents like Bill Mitchell) no substantial, needed and equitable reform of our fiscal and monetary institutions, frameworks and practices will happen while the bulk of ownership is constructed as oligarchic capitalist ownership by the very few. They can and do buy and suborn the political system and buy and control the media and the propaganda put out by all mainstream media. If this root problem of our economic system is not corrected we have no chance of significantly affecting the branch problems.

    But I guess I will get ignored as a ranter. 😉

  4. frankis
    May 6th, 2013 at 18:52 | #4

    I think I’d prefer to see GST reduced and increasing (medium term) revenue raised from carbon taxes, new improved land taxation, maybe more from capital gains.

  5. May 6th, 2013 at 19:46 | #5

    I would definitely like to see an increase in the carbon price. However there is a point where it will bring in a maximum amount of revenue and after that further increases will result in the total amount of revenue it brings in being reduced as people sensibly avoid emitting carbon. And this point is a shifting target and will decrease over time as cheaper wind and solar energy and other technologies increase the ease with which carbon emissions can be avoided. So we can increase the carbon price to get increased revenue now, but we’ll need a plan to replace that revenue as we decarbonize our civilisation.

  6. sunshine
    May 6th, 2013 at 19:53 | #6

    Good budget JQ . Lets begin reducing corporate and upper class welfare now .
    Also I feel suspicious of how short term surplus focused budgets seem to need to be . And I dont like the automatic exclusion of all things that cant be easily expressed in $ .

  7. m0nty
    May 6th, 2013 at 23:30 | #7

    Nice airbrushing of Keating from history there, Prof Q!

    Eslake also mentioned negative gearing as one of the main mistakes. It would be useful on so many levels if bipartisanship was achieved on its abolition.

    I feel those pushing for an increase in GST are taking the easy way out, as it is a rather regressive option compared to the progressive ones Eslake listed.

  8. John Quiggin
    May 7th, 2013 at 05:26 | #8

    @m0nty

    On Keating, I didn’t see the need to drag up the recession we had to have, but maybe I’ll mention it in an expanded version. It’s probably true that the length and strength of the expansion in the 1990s owed something to the depth of that recession, but that effect washed out quite some time ago, I think.

    The only problem with “negative gearing” is the concessional treatment of capital gains. Fix that, as both Eslake and I suggest, and “negative gearing” is just an ordinary business loss. I’d quarantine the losses to be carried forward against an eventual stream of earnings or capital gain.

    Finally, my package as a whole is more progressive than Eslake’s because I want to raise the top marginal rate.

  9. John Quiggin
    May 7th, 2013 at 05:31 | #9

    @frankis

    I mentioned both land taxes and capital gains.

    As regards carbon tax, if you treat petrol tax separately (as I suggest), it’s going to be very hard to raise a lot more money. The take from the current tax (before compensation) is about $10 billion, and there’s some demand elasticity, so even going to $50/tonne would only get you about another 10 billion. And while I’d support that, it’s important to remember that, in distributional terms the carbon tax is no better than the GST, perhaps worse.

  10. rog
    May 7th, 2013 at 06:46 | #10

    Marc Chandler discusses govt action (he calls it “repression”) on markets

    In addition, the US reduced the tax on capital gains and dividend income. This clearly favors the owners of capital, which, of course, are savers by definition. Many savers are also home owners. The government and Federal Reserve’s “encroachment” into the markets have directly and indirectly supported the real estate market and home prices. This tends not to be part of discussions of financial repression, but it ought to be.

    Well worth the read.

  11. Ikonoclast
    May 7th, 2013 at 09:44 | #11

    I note in the above thread not one person, other than myself, mentions unemployment, labour underutilisation, youth unemployment or all the social problems associated with these. I note also that not one person other myself refers to the real economy in any substantial way. Only the financial economy and fiscal and monetary settings get any discussion and that only in isolation from the real economy.

    From this I can infer that all other posters, including our host;

    1. Are comfortable with the current levels of unemployment, labour underutilisation and youth unemployment in our economy, all the consequent damage to the prospects of these affected and all the consequent social cost and damage which flows on to affect the rest of us.

    2. Agree with the policy maintaining an unemployment pool to keep down inflationary pressure including infationary pressure caused by other treatable factors like excess lending, financial speculation and lack of regulation.

    3. Think that fiscal and monetary budget settings have intrinsic meaning and value without reference to the real economy.

    Frankly, I expected both more empirical rigour and more concern about the above numbered issues on a left leaning blog. Apparently, I was wrong. It seems “we are all bourgeois monetarists now”. I’ll probably have to depart this now right leaning blog which has stumbled over itself in its attempts to run along with the Overton Window.

  12. sunshine
    May 7th, 2013 at 10:06 | #12

    @Ikonoclast
    Iko – my brief post at #6 was supposed to give some support to your position. Maybe the problem is JQ wanted ( for the purposes of this kind of exercise ) to stay close to what is currently politically palatable .I would have an ultimate fantasy budget including lots of non-monetary measures .GDP is a very blunt instrument .

  13. May 7th, 2013 at 10:43 | #13

    I have to say I am sickened by the fact that no one on this thread cares about malaria.

  14. pablo
    May 7th, 2013 at 10:55 | #14

    Hey Iko, lighten up, no dummy spits because overnight, no one jumped to back your efforts @3 Some of us sleep. Rants aside, I normally enjoy your erudition.
    On the unemployment issue I think the responses need to be carefully nuanced. For example mature aged and skilled unemployed deserve a more informed, less fashionista, attention than perhaps youth enjoying a ‘gap’ year. A lot more alternatives to work will have to be seriously broached as ‘limits to growth’ in advanced economies like Australia approach. Sunshine @12 is right – my fantasy budget would contain the palatable reality that we must get rid of the diesel rebate for miners. Okay that’s a Greens policy but they need to distinguish miners from primary producers (farmers). Maybe also their mineral exploration subsidy and their ability to include extraordinary depreciation against the MMRT is a big mistake.

  15. Ikonoclast
    May 7th, 2013 at 11:06 | #15

    @sunshine

    Thanks. I’ve had my dummy spit. JQ might engage, ignore or ban. That is his right on his blog. I can be arrogantly opinionated and hectoring for a lay person arguing with a Professor in the in his area of specialisation.

    Staying close to what is currently politically palatable is a recipe for hastening the onset of the disasters we face IMO. The oncoming disasters are economic depression, limits to growth and climate change, again IMO. Of course, it is a dilemma and a tragedy that what is politically palatable now is so sundered from what is empirically necessary. It is part of the paradigm of unreality and denial we all live in now.

    I have become pretty much terminally despondent about our hopes on any of these fronts. So I guess my flare-ups come from frustration and despair. When this public consensus of unreality and denial finally breaks down in the face of onrushing empirical realities, the mass turmoil and suffering will be grievous to see (and suffer).

    My opinion of politics and its machinations is that it turns intelligent people into idiots. There are no polite words to describe what it turns stupid people into. You can look at Palin, the Tea party and the US gun lobby for examples of the latter.

    The disconnect between politics (or political economy) and fundamental empirical realities is now at its greatest. This farthest separation of the elites and the propagandised from reality is always at its greatest just before the collapse of a system.

  16. John Quiggin
    May 7th, 2013 at 11:10 | #16

    @Ikonoklast At this point in the cycle, I don’t think a more expansionary fiscal policy has a lot to offer in reducing unemployment, although, as I said in the article, I’m happy with a modest deficit. As I see it, the big problems now are
    (i) overvalued exchange rate, best addressed by cutting interest rates
    (ii) mismatch & skills problems, best addressed by more education and training (as I said in the article) combined with more active labor market policy measures directed at the long-term unemployed – these should be in place permanently and therefore funded by taxation.

  17. John Foster
    May 7th, 2013 at 11:16 | #17

    John

    There is a very sensible post on Australian budget deficits by Steve Keen:
    .

  18. John Foster
  19. frankis
    May 7th, 2013 at 11:45 | #19

    I’m OK with the progressivity of current Australian income tax rates, so not sure that it would be a good idea to go back to top rates above 45% or a lower top threshold than the current ($180k). This is not America where the Wall St Journal thought this laughable illustration online.wsj.com/article/SB10001424127887323689604578220132665726040.html#articleTabs=interactive&project=WEALTH0105 made for fair comment on the pain of the personal income tax payer.

    As we’re idealising here let’s improve things in Aus by: …

    losing our brattish sibling states in favour of a Federation of enlarged local government Council areas (Regional Councils); introduce some intelligent Georgism into the land-tax arena; tax “bads” like carbon with increasing seriousness while bearing in mind the elasticity of demand and “Laffer” curve (we of course want the carbon taxes for that very reason – ultimately diminishing returns from diminished fossil fuel burning).

    I don’t like much about our pernicious little GST. It’s as you say comparably as poor as carbon taxing in distributional and distortional terms while having no ancillary benefits beyond an iron-fisted raising of revenue. It does bad things like significantly handicap Australian retailers to the benefit of offshore operators. It wastes people’s time making every single small business operator a tax agent for the Crown, which annoys me in principle. I didn’t vote for it, or little Johnnie, or that Democrats person who gave it to him. //End_of_rant//

  20. kevin1
    May 7th, 2013 at 12:23 | #20

    @John Foster
    What did you get from it?

  21. John Foster
    May 7th, 2013 at 12:55 | #21

    @kevin1
    That there is no need to target a surplus, or even a balanced budget, at the present time. This is what history tells us. As Steve argues convincingly we should aiming for a deficit of about 3% of GDP, given current economic conditions. John’s target of 1% is too low and his various suggestions concerning possible areas for budget cuts are all damaging in different ways and, thus, best left alone. All that expenditure cutting will do at the present time is make the situation worse but I fear that this is what will happen in the Budget.

  22. May 7th, 2013 at 13:26 | #22

    @John Quiggin

    I agree on cutting interest rates to attempt to lower the dollar, however I disagree with fiscal policy would not help much to reduce unemployment at the moment (although I think labour underutilisation rate is more appropriate).

    Most of the reasons why I think fiscal policy will still be effective right now stated at comment #19 of http://johnquiggin.com/2013/04/07/the-joke-titles-write-themselves/.

    Another reason is the poor Labour Force data for March, I understand the spending cuts the government is doing have partly contributed to this poor result as well as that I should not give too much weight to 1 months data even though January, February and March combined data is showing a trend of growing-stagnating-slowing economy. If April’s data showed the same trend as March data, then the case for discretionary stimulus is even stronger in my opinion.

    Furthermore, our infrastructure really is a disgrace and lags far behind Singapore, South Korea, Japan and China etc. Even though there are somes studies out there suggests that converging economies have an advantage over infrastructure development, that is not an excuse for not investing and upgrading public infrastructure. What’s more the government have no right to boast about the low 9% public debt to GDP when the train system in Sydney tends to have major delays in peak hours due to various failures every week or two. I wonder if anyone calculated the lost of productivity for not upgrading the train system of Australia (let alone all other public infrastructures).

  23. Ikonoclast
    May 7th, 2013 at 16:06 | #23

    Steve Keen makes sense in the article linked to above by John Foster. What’s more, Keen backs his argument with real data and clear logic. It’s so refreshing after the endless, obfuscating ideological balderdash from our major parties.

    To take up Prof. J.Q’s. reply, we do need a more expansionary fiscal policy but in a targetted manner. The spending would need to address very pressing infrastructure needs, social spending needs and introduce a government Job Guarantee to reduce unemployment to the frictional level.

    Inflationary pressure can be dealt with by a number of existing and new measures. Reduce excess credit lending and excess financial and speculative activity (if this is still happening). Retain the current strong wage restraint. This restraint is unfair as it stands (seeing a larger proportion of national income go to profits) but could be seen as a fair trade-off if current workers continue to endure wage restraint for the sake of employment creation for the unemployed. Introduce price restraint and profit restraint on a commensurate basis to wage restraint. This is not the same as a price freeze just as wage restraint is not a wage freeze. If workers must endure wage restraint, businesses ought to endure price and profit restraint. Anything else is not a level playing field.

    I am not sure why so many people do not place full employment policy front and central anymore. It’s as if we have forgotten the only real purpose of the economy which is to provide for people. Full employment for all who wish it and/or need it provides a living wage, social engagement and shared committment. The benefits will much outweigh the costs.

  24. rog
    May 7th, 2013 at 16:12 | #24

    @Ikonoclast I think employment is a part of Keynesian economics – the policy of austerity during a downturn creates greater losses via unemployment than running a deficit.

  25. John Quiggin
    May 7th, 2013 at 16:23 | #25

    We’re down to fairly fine points of disagreement here, but I’m more optimistic on the state of the economy than Steve. I think the economy and labour market are considerably stronger than the average over Steve’s data period, which suggests the deficit should be smaller than average. I also want to put more emphasis on monetary policy, given the anomalous strength of the dollar.

    But again, I’d stress that the need for more education/training/job search assistance as the way to reduce unemployment further.

    And of course I have no problem with taking on debt to fund capital expenditure – this shouldn’t be included in deficit measures.

  26. Ikonoclast
    May 7th, 2013 at 16:37 | #26

    On another note, I am in the middle of wading through Prof. J.Q.s’ Zombie Economics. It is clearly written. I am wading because some of the material is new and difficult to me.

    It occurs to me that a key difficulty economists perennially face, especially at the macroeconomics end, is that they are never studying the same thing. Every substantive change in institutional arrangements (legal, fiscal, monetary and financial arrangements) changes the behaviour of the formal system. The formal system is the holistic sum total of all the rules. Of course, an added complexity is that the formal system is interacting with a real system of real people and real quantities.

    The last major change of the formal system was the abandonment of the gold standard (Bretton Woods agreement) and the subsequent floating of exchange rates and progressive reduction of financial regulation. Other changes in arrangements followed including privatisation which equated to a reduction of the public component of the mixed economy.

    The only economic research initiative (to my knowledge) which has attempted to study the real formal characteristics in detail and consquently both the effects and the nascent possibilities of these formal changes is MMT (Modern Monetary Theory). Other research programs seem to precede as if these changes were either non-existent or incidental “twists” which might produce a slightly(?) different outcome from some model like the DSGE model; as if in other words economics proceeds indenpendently of the legal, administrative, formal, customary etc. matrix within which it “finds” itself.

    Cripes, that’s probably as clear as mud. I am driving at something real but may not have expressed it very well.

  27. May 7th, 2013 at 16:55 | #27

    @John Quiggin

    “And of course I have no problem with taking on debt to fund capital expenditure – this shouldn’t be included in deficit measures.”

    Couldn’t agree more.

    With regards to the interest rate, my previous correspondence with few other academic economists came to a speculation that the RBA is perhaps considering a few things at the moment:

    1. They may want to leave some room for lowering interest rates in case GFC MK-II come long, which looks increasing likely each day passby in EMU.

    2. They are maybe being cautious about lowering interest may trigger sudden outflow of foreign investment due to foreign investors panicking on the state of the Australian economy; and/or attract further and/or retain current level of foreign investments.

    3. They maybe concerned about the house prices and the housing market.

    Although its very difficult to read what the RBA is thinking about, my speculation is that, due to the above and depending on the state of the labour market, it is unlikely they’ll increase rates, as well as unlikely that interest rates will be cut below 2.5% this year. Which makes lowering of Australian Dollar via interest rate cut rather unlikely.

  28. rog
    May 7th, 2013 at 18:13 | #28

    @Tom I would be wary of chat re GFC MK2 3 or whatever, these projections seem to emanate from those that missed calling GFC MK1.

  29. rog
    May 7th, 2013 at 18:16 | #29

    @Tom Probably best to read RBA transcripts at face value without looking for inferences and coded messages. There are none.

  30. TerjeP
    May 7th, 2013 at 20:32 | #30

    We can therefore address the central question of fiscal policy: should we pay more tax, and get improved services in areas like health and education, or should we pay less and get less?

    The following poll suggests that the majority of the public thinks government should spend less. On this occasion I’ll go with the herd. Surprisingly even amongst Greens the number in favour of spending cuts is higher than the number in favour of raising taxes.

    http://essentialvision.com.au/raise-taxes-or-cut-spending

  31. rog
    May 7th, 2013 at 21:38 | #31

    @TerjeP These are the same people that demand more service “why doesn’t the govt do something about it?”

  32. Ikonoclast
    May 8th, 2013 at 06:02 | #32

    @John Quiggin

    Obsessing about budget balance while forgetting labour underutilisation and infrastructure decay is monetarism. Stressing “the need for more education/training/job search assistance as the way to reduce unemployment further” when the jobs don’t even exist is supply side economics. These are two more zombie ideas we all need to do our bit to kill.

  33. TerjeP
    May 8th, 2013 at 08:51 | #33

    @rog

    So should we ignore them when they call for spending cuts and tax constraint or should we ignore them when they call for more services? Or should we just ignore them full stop?

  34. Troy Prideaux
    May 8th, 2013 at 09:14 | #34

    rog :
    @TerjeP These are the same people that demand more service “why doesn’t the govt do something about it?”

    I’m not so sure about that. It’s my understanding (and to generalise a bit) that they’re different people.

  35. May 8th, 2013 at 09:57 | #35

    @rog

    “Probably best to read RBA transcripts at face value without looking for inferences and coded messages. There are none.”

    Transcripts are important without doubt, but when we’re talking about budget decisions which involves the future state of the economy (which involves estimating about changes in the interest rate during the period and how that will affect the exchange rate and the economy), we’ll also have to make some speculations about RBA’s responsiveness to changes in economic variables and their future decisions. Especially if one argues that the economy and thus the budget will improve when Australian Dollar falls as a result of RBA cutting interest rates to x%.

    To get an example of what I’m saying, see this post by Noah Smith: http://noahpinionblog.blogspot.com.au/2012/12/the-omnipotent-fed-idea.html

    By the way, the RBA did cut the interest rate yesterday, so I may well be wrong that they won’t cut rates below 2.5% this year. However, will that have a big effect on the exchange rate is another discussion.

  36. John Foster
    May 8th, 2013 at 10:32 | #36

    @John Quiggin
    John,
    Not including government capital expenditure in deficit measures is somewhat problematic. There are good investment decisions and bad ones. For example, I can think of a few very bad ones in the area of Defence spending in the past. Equally, there are good and bad examples of government current expenditures. The real problem is a communication one: some influential politicians have labelled all budget deficits as bad instead of leading a proper public discussion on the merits of its various components and the timing of these in relation to where the economy sits in relation to business cycle fluctuations. The ignorance out there on these matters right now is staggering and much worse than two decades ago. When Steve Keen says that 3% of GDP is fine it is clear from his other writings that a big chunk of this should be in capital expenditure as is appropriate when we are not seeking to rapidly stimulate an economy heading for a recession, as in 2008/9.

  37. kevin1
    May 8th, 2013 at 10:38 | #37

    @TerjeP

    You’re grasping at straws here. A motherhood question as bald as “raise taxes or cut spending?” tells us nothing without the “on who?” and “of what?”

  38. TerjeP
    May 8th, 2013 at 10:45 | #38

    Kevin1 – I see you don’t like public opinion. Fair enough. Nor do I on lots of issues.

  39. John Quiggin
    May 8th, 2013 at 10:52 | #39

    @TerjeP

    And the poll is all about who is to blame for the “national debt”. Ask stupid questions, get stupid answers.

    I saw recently that the vast majority of Liberal party supporters (the ones who drove the answers to Terje’s questions) believe our government debt is higher than that of most other countries when of course the opposite is true.

    At some point, Terje, you must be disheartened by the fact that nearly everyone who agrees with you does so on the basis of delusional beliefs and fraudulent anti-science “research” (on economics, climate change, guns and just about everything else).

  40. kevin1
    May 8th, 2013 at 11:04 | #40

    @TerjeP

    And after the levy was announced, 78% were in favour of NDIS.

  41. Ikonoclast
    May 8th, 2013 at 11:05 | #41

    For anyone who hasn’t seen the Chasers confront Tony Abbott on debt;

  42. John Foster
    May 8th, 2013 at 13:25 | #42

    @John Quiggin
    Bill Mitchell has just argued on Crikey that the state of the economy justifies a budget deficit of 4.5% of GDP. There seems to be a left-right disagreement developing here and, surprisingly, John is sitting on the right!

  43. Ikonoclast
    May 8th, 2013 at 14:30 | #43

    I am going to try again to draw out Prof. J.Q.’s views on the issue of current unemployment.

    On page 108 of Zombie Economics, John Quiggin writes;

    “It follows (from the preceding argument) that markets cannot evaluate and price every possible risk, and that, given a sufficiently large accumulation of risk, market systems of insurance will fail. The alternatives facing society are either to endure long periods of recession and depression while markets gradually rebuild failed institutions, or to call on government institutions as lenders, insurers, and employers of last resort.”

    There are the words in black and white, “employers of last resort”. Given this implied* theoretical support for government as an employer of last resort, I ask John the question; what practical form should support this take as policy? Professor Bill Mitchell clearly wants to fully institutionalise the ppolicy if “employer of last resort” as his and CofFEE’s Job Guarantee. Bill and CofFEE have developed several detailed plans and costings over the years on how this could be achieved. I will leave people to research this information for themselves.

    They want to replace the “reserve pool of the unemployed” with the employment buffer stock model. Again I leave people to research this information for themselves. The costings appear well within the feasible range and smaller than the sums we waste, arguably, on “initiatives” like the second Iraq and Afghanistan war, building submarines and creating a sovereign “wealth” fund.

    If we removed even one of these wasteful initiatives we could fund a Job Guarantee for 5 to 10 years on those funds alone.

    From a social democratic point of view, I support Prof. Mitchell’s call for budget deficit of 4.5% this year and the progress to a full Job Guarantee. I would be more worried than Bill Mitchell about inflation but I would be less worried than John Quiggin. If you got inflation predictions from Bill and John for this budget deficit, my belief is could average them and get pretty close to the real consequent effect.

    I also want to point out that the phrase “while markets gradually rebuild failed institutions” might well contain an unwarranted assumption. There is no prima facie guarantee that the markets will ever rebuild all failed insitutions or components of the economy.

    * Note: The support is implied as it occurs in the chapter critiqueing DSGE theory as a “zombie” idea. Standard DSGE theory supports or butresses the Efficient Markets Hypothesis in strong form which J.Q. also rejects as a zombie idea. In both cases he marshals empirical evidence to reject these “zombie” ideas. This by implication and along with John’s known social democrat sympathies amounts to a rejection of the notion of allowing society and individuals to endure long periods of recession and depression without corrective state action. A “zombie” idea might be termed a “mistaken idea which somehow manages to keep itself alive despite being continually contradicted by real facts and real events”.

  44. May 8th, 2013 at 20:18 | #44

    Apparently the use of GDP as a relevant benchmark is now a Keynesian plot! I suspect the Fabians?

    http://catallaxyfiles.com/2013/05/08/on-per-cent-of-gdp/

  45. Ikonoclast
    May 8th, 2013 at 21:16 | #45

    @KS

    Yep, and caring for other human beings is a communist plot.

  46. John Quiggin
    May 8th, 2013 at 22:00 | #46

    @KS

    Looking at rightwing discussions nowadays reminds me of the far Left in the early 70s – the same preference for tribal affirmation over any adherence to reality. In some cases (Windschuttle, Catley), it’s actually the same people.

  47. TerjeP
    May 8th, 2013 at 22:03 | #47

    At some point, Terje, you must be disheartened by the fact that nearly everyone who agrees with you does so on the basis of delusional beliefs and fraudulent anti-science “research” (on economics, climate change, guns and just about everything else).

    John – Not sure why your making this personal. On any of those topics the vast bulk of the population that has a view, one way or the other, does so on the basis of quite limited insight and information. There are also a number of people on both sides of the various debates that are very well informed. I’m disheartened that more people aren’t well informed but neither side of these debates has a monopoly on delusional supporters. If you haven’t noticed some delusional individuals on your side of these debates then you yourself are being delusional.

    As for the poll I don’t see why you think it is all about blame. It simply asks which solution to an issue people prefer. They have an option to say “neither” or “don’t no”. You are allowed to disagree with the majority position. Suggesting it is a question about blame seems silly. Is your question about more service versus less tax a blame question?

  48. TerjeP
    May 8th, 2013 at 22:15 | #48

    @KS

    Why are you trying to verbal Samuel? He makes a good point. Looking at government expenditure relative to GDP does tend to hide from view the growth in government. He does not mentions any plot. He is just defending absolute numbers against the charge of being “misleading”.

    Here is the nub of what he said:-

    I do not want to understate the importance of national accounts – they have an important place in a modern economy, and allow for comparisons between countries and over time.

    But comparing everything against GDP can be misleading. I think that comparing many expenditure items against GDP has tended to hide large increases in government spending.

  49. rog
    May 9th, 2013 at 03:02 | #49

    @Troy Prideaux A “call for action” by Govt can take many forms – policy or funding response.

  50. rog
    May 9th, 2013 at 03:13 | #50

    @Tom The RBA might consider exchange rate and other issues but it’s main purpose is outlined in law ie RBA Act 1959. This purpose is generally agreed as currency stability ie a control on inflation. To shift RBA activities would require legislative changes.

  51. kevin1
    May 9th, 2013 at 08:42 | #51

    @TerjeP
    Terje, hoping for a response to my #40 that explains how you hold on to your worldview, when 78% of people support the NDIS knowing it means higher taxes.

  52. Troy Prideaux
    May 9th, 2013 at 09:03 | #52

    @TerjeP

    TerjeP :
    Why are you trying to verbal Samuel? He makes a good point. Looking at government expenditure relative to GDP does tend to hide from view the growth in government. He does

    Michael Chaney (April 30th) on Lateline discussed the size of government and stated:
    “For example, it’s grown from 25 per cent of GDP to 35 per cent since the 1970s and if it keeps going it will be at an unsustainable level, maybe 50 per cent, according to some estimates.”

  53. TerjeP
    May 9th, 2013 at 13:47 | #53

    kevin1 – I’m not sure what you think my worldview is. Or why you think it should depend on the general publics opinion of the NDIS? Feel free to elaborate.

  54. kevin1
    May 9th, 2013 at 18:28 | #54

    @TerjeP
    First you quoted the Essential Vision poll, and said the majority of people want govt to spend less (actually, at 55% barely a majority). In fact, given your concern that the govt not ignore the people’s will, you should be applauding the govt’s fiscal response as consistent with the results of your preferred poll. It is now raising taxes (13% of respondents supported this), and cutting spending (55% of respondents supported this.) The remaining 32% gave no practical help, being “neither” or “don’t know”.

    My point was such a general sentiment is ultimately meaningless and no guide to action, absent people nominating govt’s appropriate objectives ie. what to cut. (Obviously no-one, including me, would like it to spend more than is necessary.) So your strong conclusions here are also meaningless.

    The striking contradiction to your conclusions are the overwhelming endorsement of the NDIS (post a widespread awareness of 1. the levy and 2. the unfunded status of part of its liabilities). People do not see govt as intrinsically evil and unable to be influenced towards a positive role, which I take as the libertarian position.

  55. TerjeP
    May 9th, 2013 at 22:07 | #55

    So your strong conclusions here are also meaningless.

    Kevin1 – let me offer you a small challenge. Go back over the discussion that has been had here and find the comment in which I articulated these “strong conclusions” that you refer to. Copy the “strong conclusions” that I stated and then quote it back to me. Because having read back over this discussion I really have no clue what you are on about.

  56. kevin1
    May 10th, 2013 at 00:46 | #56

    @TerjeP
    “The following poll suggests that the majority of the public thinks government should spend less. On this occasion I’ll go with the herd. …So should we ignore them when they call for spending cuts and tax constraint or should we ignore them when they call for more services?”

    Yes and yes. You make much of these results, but we should interpret such generalities as meaningless in isolation, because in the same breath people endorse a new program requiring many billions of new spending, plus a new tax. The most likely conclusion which squares the circle is that people want the govt to be efficient and effective – a mantra accepted by all parties – not that small government is desirable. You’ll never be with the herd, because your political project has no traction in a civilised society.

  57. Ikonoclast
    May 10th, 2013 at 04:40 | #57

    @kevin1

    “Everyone is always in favor of general economy and particular expenditure.” – Sir Anthony Eden.

  58. Ikonoclast
    May 10th, 2013 at 04:48 | #58

    On the same topic, I remember an article many years ago in the broadsheet Courier-Mail where the journalist was one of those typical old conservative curmudgeons*. He managed to complain in the one article and just a few short paragraphs apart about (a) high government taxes and (b) the fact that Social Security wasn’t helping his old mother enough.

    * No, it actually wasn’t Lawrie Kavanagh but the name escapes me now.

  59. TerjeP
    May 10th, 2013 at 08:39 | #59

    The most likely conclusion which squares the circle is that people want the govt to be efficient and effective – a mantra accepted by all parties – not that small government is desirable.

    Nowhere did I state that this poll indicates people want smaller government. You must have imagined that conclusion. I didn’t state it or even think it.

    You’ll never be with the herd, because your political project has no traction in a civilised society.

    You have no clue what you are on about. But carry on.

  60. May 10th, 2013 at 09:52 | #60

    @rog

    I do not disagree with your comment. As a matter of discussion I’m not even sure why you’d think that I’m suggesting the RBA is not acting their role by considerings the issues in my previous comment.

    No where in section 10(2) of the RBA Act 1959 mentioned anything about inflation, however since the RBA perceive inflation may affect (a) the stability of the currency of Australia; (b) the maintenance of full employment in Australia; and; (c) the economic prosperity and welfare of the people of Australia which leads to them targetting inflation. The same can be said about my previous comments of the issues which I speculate the RBA MAY be concerned about e.g. IF they perceive the foreign investment is necessary to achieve full employment and economic prosperity and welfare of the people of Australia; the level of foreign investment was a result of relative high interest rate and stable Australia Dollar (even if it may be overvalued); and the benefits of maintaining or increasing the level of foreign investment outweights the cost of high Australian Dollar and relative high interest rate.

  61. kevin1
    May 10th, 2013 at 09:55 | #61

    @TerjeP

    The following poll suggests that the majority of the public thinks government should spend less….Nowhere did I state that this poll indicates people want smaller government

    Care to explain?

    And no attempt to reconcile the contradiction between first statement and the NDIS poll, so I guess you concede the vacuousness of your preferred poll.

  62. TerjeP
    May 10th, 2013 at 12:44 | #62

    Kevin1 – the budget is going to be in deficit. Tax revenue has risen around 7% but spending has risen faster. If you want a surplus you need to either raise even more tax revenue (presumable through more taxes or higher tax rates) or else spend less than you planned on spending. However spending less than you planned when spending was planned to grow is not the same as shrinking government. To shrink government you need to do more than spend less than revenue or less than what has been budgeted. To get smaller government you need to spend less than you are currently spending.

  63. May 10th, 2013 at 13:10 | #63

    Terje, stop spinning Catallaxy garbage.

    The budget will cut about 3/4 of a % point of Annual growth.

    with nominal growth likely to be LESS than 3% any further contraction on the part of fiscal policy could have bad consequences.

    If spending was the problem then interest rates would not have been cut!

  64. TerjeP
    May 10th, 2013 at 21:06 | #64

    @nottrampis which particular sentence at @TerjeP are you objecting to?

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