Deficit fetishism

As the Mid-Year Economic and Fiscal Outlook approaches, talk about the budget deficit is approaching panic. This piece from Deloitte, warning that “the budget is burning” is typical. It predicts a 2014-15 budget deficit of $34.7 billion, and future deficits “as far as the eye can see”.

Billion dollar numbers are big and scary, but some perspective is useful. Australia’s GDP is currently $1.6 trillion dollars per year, so the massive deficit is about 2 per cent of GDP. On Deloitte’s current “disastrous” predictions, the deficit should be below 1 per cent of GDP by 2017-18.

But wait, there’s more. Australian government debt is currently about 20 per cent of GDP. It has been around this ratio, varying with the business cycle, for many years. Since GDP grows at around 5 per cent a year in nominal terms, the debt/GDP ratio stays unchanged if debt also grows by 5 per cent, that is, if deficits are equal to 1 per cent of GDP (that is, 5 per cent of 20 per cent).

Simply put, the budget is so close to balance that it doesn’t matter. In the absence of the terms of trade shock from coal and iron ore, it would have made good sense to aim for a surplus. As it is, the sensible short-term macro strategy is to take a modest hit to the deficit and cushion the economy from contraction, a point that has been made by the OECD.

As always, there are long term problems that need to be addressed. But absurd panics about whether a (necessarily arbitrary) budget measure is a little above or a little below zero don’t help.

39 thoughts on “Deficit fetishism

  1. You economists (JQ) just don’t get it do you. I heard Barnaby this very morning on Radio National (apropos of what I am unsure) explaining that the debt is a really big problem. He was saying that if we don’t deal with it now then later it will be ‘very bad’ or something equally technical. Unfortunately he didn’t provide a household analogy like Joe and Tony tend to but he would know. You economists have no place politicizing economic issues in this way….. or is that economicizing political issues???

  2. Just caught the tail end of an interview with Julie Bishop by Fran Kelly in RN this morning. Amongst other things, she said how much she welcomed the appointment of the new sec of premier and cabinet. Just sounded somehow interesting, the quite confident and authoritative way she said “I [not PM or Government] welcome” the appointment. Anyway enough of this fascinating speculation …

    More related to the topic of the thread, she said we need a copayment because Medicare is unsustainable. When Fran Kelly said it was not going to Medicare, but medical research, J Bishop said something about ‘it’s a savings measure’ before quickly going on to talk about other things. The only way I can see it being a saving measure is if they intend to cut public funding to medical research accordingly – ie shift the funding of medical research to the new ‘foundation’ or whatever they’re calling it, and cut funding to NHMRC.

    This looks like it’s all part of a general privatization shift, which I think is what many in public health research (including me) think is the long term agenda. I just wish the conservatives would be honest about their long term agenda instead of BSing about it all the time.

  3. Remember the 1990 US budget projections that they would never see a surplus ever again? And then, 10yrs later, the same CBO predicted surpluses on such an ongoing basis that it would impair markets. Complete muppets, as is anyone who believes these absurd predictions. They don’t seem to understand the drivers of the budget, and display breathtaking recency bias and anchoring.

  4. @Dave Lisle
    So Dave, you get your economic analysis from Barnaby Joyce????? That’s like going to a cosmetician to plan your retirement strategies.
    Me, I’d prefer to trust the analysis from Deloitte…..

  5. Of course I go to Barnaby for economic analysis. And Hunt for environmental science, and Morrison for tips on torture.

  6. The size of the deficit, as an accounting number considered in isolation, does not matter. The size of the deficit or surplus compared to what is happening in the real economy does matter. If there is unused capacity (labour and/or capital equipment) then the deficit should be made larger until the unused capacity is put to work. The only important caveat on that is inflation. We should push the economy as hard as possible provided inflation remains acceptable. The acceptable inflation band should be widened to 5% at the upper limit.

    Inflation can be restrained by putting limits on bank lending for consumption, including mortgages. It would be better for stimulus to come from targetted government monies than from lending which creates asset bubbles in certain sectors, for example in housing. Economy distorting subsidies (negative gearing and fossil fuel subsidies) should be abolished. Again they could be replaced by targetted government spending as appropriate: infrastructure, health, welfare and education would be good places to start. Taxation on the rich should increase and taxation on the poor reduce.

    Pushing the economy as hard as possible does not necessarily equate to pushing the strain on the environment as much as possible. Indeed, targetting renewable energy and environmental care and remediation can both lift GDP and reduce environmental damage.

    The above would be mid term goals. In the long run we will need to stabilise population and stabilise our physical footprint on the earth. Growth can continue qualitatively beyond that point as knowledge and (enlightened) technology growth. There is a theoretical limit to even qualitative economic growth on earth but it is likely so far away we cannot predict an end point yet.

    Of course, we could still blow it and collapse everything (environment and economy). The next 50 to 100 years will be very challenging for human civilization.

  7. The topic title should be “deficit moral panic” rather than fetishism, which for more than a decade and perhaps two, has been related to “achievement” of surpluses — i.e. contraction of the economy and a transfer of public debt to private debt.

    Really, unless the conditions suggest that economic activity is causing distortions in the price of labour in some sectors and/or radically disrupting prices of goods and services, why would one want to impose a contraction?

    This is really quite a separate argument from whether any particular programmed spending item is warranted in public interest and passes reasonable equity tests, yet they are often bundled as if they are part of some swingeing moral claim about the evils of debt, virtues of austerity, and the need to preserve privilege.

    IMO state policy ought to ensure

    a) that it raises sufficient funds to meet expenditures warranted in the public interest
    b) that debt is used to ensure a close temporal match between the beneficiaries of the programs and the community being levied
    c) that the costs of any debt service are acceptable and meet the criterion specified in (b) above
    d) that burdens are settled equitably, so that those most able to support state policies contribute the most

    Aside from those criteria, whether any given budget is in notional surplus or deficit seems entirely trivial. If those criteria are met, then government will be discharging its obligations as best it can to the community it serves and that community will be best placed by this service to bear the levies and live in harmony with each other. Obsessive focus on ‘budget bottom lines’ is at best, ignorant populist posturing, and more commonly in practice, an attempt to bolster the privileges of the elite especially at the expense of the bottom two or three quintiles of the populace by conning them into thinking that government budgets strongly resemble personal budgets.

  8. Someone please correct me if this is wrong. I used to think that going into debt was dubious but my reading of our money system is now that we actually need debt because mechanics wise, our economy actually runs on debt on a grand scale (that may be a bad idea for other reasons but none which this government or the opposition would see currently as an issue).

    The idea seems to be that the Government sells bonds, in effect going into debt, which people actually want to different extents here and overseas. These provide a benchmark for interest rates and other bonds and loans ad nauseum and so in fact power the economy providing churn and investments which are as about as secure as anything which the private sector can then bounce off and go into much greater further debt for less good reasons and so get charged a premium interest relative to the government bond benchmark.

    Conversely if the government didnt have a facility for bonds selling and going into debt they couldnt raise money to smooth things over day to day so they keep the credit card so they can actually have a credit rating or sorts …or something like that.

    So what we have here in this debt is more analogous to a minor credit card debt (compared to say one’s housing asset) which helps smooth the money in money out cycle without having to deal in big bundles of cash.

    Separately talking up the debt seems to be simply a political ploy for justifying cuts to public spending on services and infrastructure the liberals dont like on ideological grounds end of story. So I cant see how this is actually a fetish either.

  9. I have long held that “What does not go into welfare goes into warfare.” The neocons cut welfare and spend up big on warfare. To take an example, ABC and SBS face $200-$300 million in shared cuts over the next five years (average of $60 million a year). The media have reported that the cost of fighting ISIS will cost Australia $500 million a year. So in fact, we could stay out of the ISIS fight and increase ABC/SBS spending by $40 million, not cut by $60 million (per annum average) and still save the budget $400 million a year.

    Not fighting ISIS would be the sensible thing to do. The West (US in particular) created ISIS by various idiotic acts (invading Iraq, destroying its military, provoking Sunni reaction, funding fundamentalists in the Syrian opposition and so on).

    If ISIS becomes a threat to M.E. nations they know what to do. Qatar and Saudi Arabia could stop funding them. Turkey and Iran in particular could mobilise their massive armies and squash ISIS with ease. Global Firepower ranks Turkey as the 8th most powerful military power in the world after France and Germany. Iran is ranked 22nd. They could deal with ISIS if they wished to.

  10. The budget problem was so bad, we had to tip a few thousand more people into unemployment (i.e. public servants). The logic of that move was not particularly convincing, especially given the figures Prof J.Q has cited above.

    In fact, Clive Palmer, in answering a journalist’s question at the National Press Club, said much the same thing as J.Q. He also added that Treasurer Joe Hockey speaks to the strength of our economy and its balance sheet, when he is overseas; when in Australia, we get the domestic version of the speech where every good thing is switched into being a bad thing. Isn’t politics fun.

  11. @Newtownian
    It’s even better than that. The good professor has already pointed out that the economy grows by a nominal 5% pa. The money supply needs to grow with it. If necessary, the bonds could be redeemed by virtue of growth alone.

  12. @Ikonoclast

    Worse than that, it looks like NATO itself is arming and supplying IS through Turkey.

    “DW” has a report on it on their website:

    Every day, trucks laden with food, clothing, and other supplies cross the border from Turkey to Syria. It is unclear who is picking up the goods. The haulers believe most of the cargo is going to the “Islamic State” militia. Oil, weapons, and soldiers are also being smuggled over the border, and Kurdish volunteers are now patrolling the area in a bid to stem the supplies.

  13. @Megan It’s necessary to attempt dialogue and engage with terrorists, it’s isolation and ignorance that strengthens their beliefs.

  14. @John Brookes They started off with a debt & deficit disaster and have ramped it up to such levels that a double dissolution could be in order – and they could just pull it off.

  15. I assume these dire forecasts are made for sound commercial reasons – to enhance the value of Deloitte economics by currying favour with the Coalition. Of course the incidential cost is to talk-down the economy at a time with this is not at all sought. There is a strong market for economic hysteria in Australia.

  16. @Ikonoclast
    “ The economy of many countries was allowed to stagnate, land went out of cultivation, capital equipment was not added to, great blocks of the population were prevented from working and kept half alive by State charity. But this, too, entailed military weakness, and since the privations it inflicted were obviously unnecessary, it made opposition inevitable. The problem was how to keep the wheels of industry turning without increasing the real wealth of the world. Goods must be produced, but they must not be distributed. And in practice the only way of achieving this was by continuous warfare. “ George Orwell, 1984.

  17. More perspective: much more of the federal debt is in foreign hands than a decade ago. The states are in debt and Qld is in deficit. PPPs and service outsourcing are adding to liabilities which would once have been seen in debt. Brisbane council is in debt. Households have large amounts of mortgage debt, much of it foreign owned.
    GDP might not grow at 5% – the resource capex and job boom is ending as is car manufacturing; resource prices are crashing and coal might never recover; GDP is being propped up by debt, selling off the farm, ports, utilities, the house, educational resources, and short term and permanent access to the job/health and education services/ welfare market through education and other visas.
    El Nino is threatening and CO2 is about 400 ppm and rising and the driest inhabited continent is reducing it’s per capita available farmland and water by growing it’s population.
    Substantial replacement sources of wealth and high paying jobs for the country are not apparent on a national scale though domestic tourism and some ag will benefit from the dollar’s fall (cheap access to cruises and foreign destinations could continue with falling oil prices). Manufacturing does not look promising in general. Services are going offshore eg mining head offices, Uber, Google, Amazon. Jobs, earnings and taxes have followed.

  18. Thanks JQ. I love it when data and logic (all within 3 paragraphs) bursts the neo-con thought bubble.

  19. @Stockingrate
    Yup, agree with all of that. However, yes we’ve sold our public assets and manufacturing capability and iconic companies, but we still have many dwellings and prime residential land to sell to rich corrupt Chinese officials who are all too willing to come and buy up with a government and regulatory blessing in all but name (zero prosecutions in the last… what… 6 years?) Once again, thank gawd for the Chinese to once again save the day. Now let’s see when the $ozzie drops below 80c US, what’s left will be at fire-sale prices.

  20. This debt tsunami is terrifying! What is Abbott doing? If this had been happening under a Labor government the downfall of western civilisation would be just around the corner. If only that wise guardian of the public purse, John Howard, were still in office. Perhaps those wise folks at Deloitte Economics will help me safeguard my investments? It couldn’t hurt to ask them.

    Seriously, I agree that the debt fear is nonsense. Indeed I would not mind if we had a little more debt and invested more in both infastructure and education/research. But I do find it very hard to feel sorry for the current government’s political predicament, having talked nothing but paranoid nonsense about debt themselves during six years in opposition. They sowed this crazy idea, and now they are reaping the criticism from the loons who believed them.

  21. As someone who has a lot of time for Chris Richardson, I was very surprised by this latest piece of his. Not only does it fail to put the size of the projected deficit into economic perspective – the error John points to – even on their own terms I think the projections are way too pessimistic. We’ve had a collapse in revenue because of some very specific factors – basically the failure of the dollar to follow the terms of trade down, and what that has meant for nominal income growth and also for the capacity of some multinationals to shift accounting profits offshore – which there is no reason at all to believe will continue.

    My prediction: Joe Hockey will announce both a surprise surplus and some modest tax cuts in his pre-election Budget.

  22. I was suprised to hear the buffoon on the radio today pleading with the public not to let down Santa Claus this xmas and to go out and spend up big!!

    I was wondering if he was suggesting we do this from our savings (thus reducing the pool of local savings available for loans and thus raising interest rates and squeezing out productive investment) or should we borrow to increase our Xmas expenditure (thus increasing the demand for loans – raising the interest rates again, or encouraging overseas borrowings by the banks and increasing the level of Australian indebtedness) or should we simply divert some expenditure from other areas to Xmas expenditure (thus lowering employment in these other areas)? I could go on – but i’m feeling a bit silly already.

    What is he saying – Party now and don’t worry about the consequences?? it goes completely against their whole confected austerity narative or the big scary deficit future.

    These clowns are in a big mess of their own making and for the first time in 3 -4 years I’m astonished to be contemplating an Abbott Govt that might just be a 1 termer.

  23. @Troy Prideaux
    And below 70c and below 60c and……

    Foreigners purchasing of housing might be moderated as the unsustainability of welfare and employment becomes evident. (I trust our politicians to sell us out without hindrance) The difficulty of locals supporting house prices with wages will surface as soon as foreigners slow their purchases if not before.

  24. (With the preface that I’m way out in Dunning-Kruger land on this…)

    When I hear politicians talking about this the impression I get is their concern is about the ability of the Government to service it’s debt with the income that it has.

    GDP, as I understand it, is an aggregate of all the “value added” by entities resident in the country.

    Isn’t the problem the ability of the Government to capture a reasonable amount of that as income?

    Obviously if you’re a politician with an ideology that commits you to the reduction of the size of the Government (taxes, “red tape”) then you are going to have a problem with Government debt because you don’t believe you can increase the income?

  25. Yesterday’s performance by Abbott and co in question time was to repeat the same old 3 word slogans that they used before the last election eg debt deficit disaster. They are still in election mode and seem unable to flip the switch to government ie govern all of Australia not just the coalition voters.

    Abbotts alleged policy of destroying the ALP has bounced back onto him, in 12 months he has reversed the polls that put him into govt. I don’t think that he can turn this around as it isn’t in his DNA to cut deals.

    In a recent speech by Lowe from the RBA the negativity was touched on

    this uncertainty mutates into chronic pessimism – that is, for it to become normal for us to think that our prospects are limited. If this were to become our normal mindset, then we would be well on the way to finding ourselves in the very world that we feared.

  26. Stockingrate :
    @Troy Prideaux
    And below 70c and below 60c and……
    Foreigners purchasing of housing might be moderated as the unsustainability of welfare and employment becomes evident. (I trust our politicians to sell us out without hindrance) The difficulty of locals supporting house prices with wages will surface as soon as foreigners slow their purchases if not before.

    I can’t see the $ozzie falling below 80c US whilst there’s so much willing foreign investment in residential housing. The Chinese gov have lots of levers to pull to keep their economy churning along. If our government really wanted to lower our dollar, they would crack down on this foreign investment in residential housing, but as you say – do we now even have the capacity to fully utilise a lower dollar and can the government afford another hit to revenue? The risk of a lower dollar is that is makes foreign acquisition of local assets cheaper whilst making it more expensive for us to invest offshore whilst also lowering the standard of living for a consumer (import) based economy and potentially putting pressure on inflation (like we can handle interest rate increases right now). The advantages for trade exposed exporters and tourism are obvious, but that capacity seems to be continually diminishing and can’t be just be recovered with an increase in demand or growth potential if much of the economy is “over qualified”.

  27. I am with DD on this.
    However if the $A doesn’t fall then the government is toast.

    a $A falling to reasonable levels given our TOT would mean Nominal GDP getting back to trend and suddenly miraculously the deficit no more!


    the Commission of audit forecast a period of below trend Nominal GDP growth without ever saying why and net Debt got to n,wait for it, 17.5% of GDP!

  28. @rog

    “this uncertainty mutates into chronic pessimism – that is, for it to become normal for us to think that our prospects are limited. If this were to become our normal mindset, then we would be well on the way to finding ourselves in the very world that we feared.” – RBA.

    This is what we get from the RBA; cheap psychologism. The “pessimism/optimism” explanation is one of the weakest explanations for economic cycles. It’s a third order issue at best. Pessimism and optimism in an economy, as oscillations away from the average “animal spirits” of the populace, must have more fundamental causes. It is these fundamental causes which must be addressed. The unemployed as a group cannot all “will” themselves into paying jobs with “optimism” when there are six to eight unemployed for each job. There are structural and systemic problems to be addressed.

  29. Optimism can presumably affect share trading markets, but then, if people have a share market in front of them where the index is inexorably rising, month after month, year after year, it is rational to consider investing in that market, all other things equal. Presumably there comes a point where the demand for shares becomes a significant factor in the rate of increase of the index, and then leveraging by borrowing to purchase shares becomes worthwhile, for a while, until the music stops. Being a complex nonlinear system with plenty of feedback loops in it, I have absolutely no idea if it is even possible to determine why a market can go from soothing upwards motion to smashing into bits in a few hours (the most spectacular type of crash), or lurching downwards in multiple paroxysms of panic, taking months to unwind. I think the terms of optimism and pessimism might be true for us mug punters, but for the professionals who deal in other people’s money, I suspect eternally optimistic—with good reason—is how they feel. The best fleecing job in the history of personkind :-0

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