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The pantomime continues – Australia’s debt ceiling

The opening paragraph read “National debt will continue to balloon throughout the first term of the Coalition government, despite harsh spending cuts to be identified by a Commission of Audit, a crackdown on public service jobs, and a promise that government would be smaller”. Of-course, the journalist meant to say “because of” rather than “despite” but his neo-liberal keyboard thwarted his better understanding. The article was about the debate now in full swing about our debt ceiling. That’s right, suddenly, Australia has a debt ceiling debate. As if the nonsense in the US wasn’t enough. We had to show the world how stupid we are as a nation by having our own ceiling and then spawning a debate about, which then sees salivating journalists chasing politicians around asking them all sorts of questions about increasing it etc. None of the above has any foundation in economics yet will lead to poor policy choices being taken which will undermine social and economic prosperity. What a vacuous world politics and the industry that is fed by it really is!

First, we had the – announcement – on October 22, 2013 that the new Federal government had established a Commission of Audit – to “get spending growth under control”.

The Treasurer told a – media conference – in Canberra that day that:

We have to fix the Budget. We have to fix the Budget … The percentage of GDP keeps increasing. Over time when you have an actual figure, it decreases as a percentage of GDP and that is attractive to us … What matters is not the debt limit, it is the debt, and the level of the debt.

Which is so confused that you wonder whether it was an adult talking, much less the Treasurer of one of the richest nations in the world. The debt limit is about the level of debt!

The Commission’s – Terms of Reference – reads likes an ideological diatribe rather than a credible document a national currency-issuing government would put out.

We read, for example that a guiding principle of the “Audit” is that the Commonwealth:

… government should live within its means.

Note “should” is a moral concept rather than a technical statement.

Further, there is no mention of real resources in the document, which means that the body that is drafting this document (Treasury) fundamentally misunderstands what the “means” that are available to the Commonwealth government or chooses to lie point-blank to serve the ideological aspirations of the politicians.

The chair of the Commission will be the President of the Business Council of Australia, who has led the charge in PPPs etc and can hardly be considered an expert on government spending and taxation or the public objectives that governments should pursue.

In April this year (in the lead up to the federal budget), the BCA President told a large business gathering in that the then Labor government was pursuing a “class war” (mainly related to the introduction carbon and mining taxes) and that the budget deficit was hurting the national reputation and would “limit policy choices over the coming decade”.

On August 20, 2013, he published an – article – and said:

Right now, we are staring down the barrel of almost a decade of deficits. This is the result of not having lived within our means, of not spending taxpayers’ money wisely … The scrutiny must go to the extent to which budget rules, budget discipline and proper processes will ensure we never end up in this situation again … We can’t just keep spending as though we never have to consider whether it’s the best use of our scarce money, and never have to make the hard decisions despite slowing economic growth.

Which immediately tells you he knows very little about macroeconomics.

1. We have at least 15 per cent of our available labour resources not being utilised – either unemployed or underemployed.

2. We are wasting our “productive” means rather than living beyond our means.

3. Taxpayers money is not spent – it is withdrawn by coercion from spending by governments to free up real resource space so that the public sector can pursue its socio-economic program.

4. Government money is not “scarce” – in fact, it is almost infinite.

5. A government should never cut net spending when there is “slowing economic growth”. That would be irresponsible and an abandonment of its duty as the currency-issuer.

And this character is now in charge of a major audit of government fiscal policy. A very tawdry display indeed.

As an aside, the British PM let the cat out of the bag in a speech to the – Lord Mayor’s Banquet 2013 – in London on Monday. He said that:

We need to do more with less. Not just now, but permanently.

I’m sure the attendees were not doing more with less (food and drink). The point he was making was that the cuts are permanent and aimed at reducing the size of government (an ideological aim that is not indicated by any known economic theory to be a desirable thing) rather than meeting any short-term emergency. But that is another topic another day.

But the claim “more with less” is used as code for cutting net government spending as well as purporting to be a statement about efficiency of resource usage. The two issues are quite separate. The first, is about macroeconomics and relates to the state of aggregate demand in the economy in question. The second, is more about microeconomics, in that it relates to how much output one gets from a unit of input.

What does that mean? It is clear that wastage is to be discouraged. So for a given command of real resources the user should seek to utilise them in a way that gives the best outcomes whatever the goal of the activity is. That is a statement of efficiency.

An analysis of public sector real resource usage may lead to the conclusion that there is unnecessary waste involved, which should be dealt with in an appropriate way. That may lead to reductions in spending in that activity under scrutiny. If the purported aims of the activity were met with less real resources being required (and by implication, less dollars being outlaid) then we would consider that to be an improvement.

But that leaves the macro question. What is the appropriate level of net government spending given the spending and saving intentions of the private domestic sector and the contribution to aggregate demand of the external sector and the desire of government to maintain full employment.

In other words, a government may reduce nominal outlays (that is, spending) in a particular activity as an improvement in its operations – but, if the current overall level of net government spending is, for example, appropriate then particular spending cuts have to be offset by increased public spending elsewhere.

Moreover, if the nation is carrying significant idle resources, which Britain certainly is, then the level of net public spending is already too low relative to the spending intentions of the other macro sectors. In that case, “doing more with less” will exacerbate the deficiency in aggregate demand.

The point is that we always need to understand that while efficiency drives may be desirable they can also compromise the macroeconomic stands that is required for overall well-being in the economy.

Most conservatives (and progressives) confuse the two elements of this issue.

Anyway, back to the debt ceiling. On the same day, as the Treasurer announced the Audit, the Government also said it ould be seeking to increase the debt ceiling to $A500 billion.

I introduced the Australian debt ceiling in this recent blog – Living in the Land of Smoke and Mirrors – aka La-La-Land. You learn that the idea is relatively recent and was introduced by the Labor Party while in government as an amendment in 2008 to an ancient piece of 1911 legislation (ancient is relative when you are talking about white Australian settlement)

As an aside, ancient is also absolute when talking about Australia as a land mass. The ABC News reported today (November, 2013) – Rock microbes found in WA’s Pilbara could be earliest signs of life on Earth – that scientists have found “a complex microbial ecosystem in well-preserved sedimentary rocks that are almost three-and-a-half billion years old” out in the Pilbara region (near Marble Bar) of Western Australia. The discovery is “the oldest evidence for life on Earth”. That is ancient.

I could have been a geologist or an archeologist or something!

Instead, I write about economics.

Anyway, the latest scene in this comedy is that the Government, which claimed before the election that illustrate it was about to go bankrupt has now admitted that the deficit will not be coming down any time soon and so the voluntarily-imposed debt ceiling will have to rise from $A300 billion to $A500 billion.

The UK Guardian article (November 13, 2013) – Labor like Tea Party on debt limit, says Tony Abbott – reported that the Labor Party (now in federal opposition after losing the election in September) is opposing the proposed increase in the debt ceiling.

That is, instead of admitting that the whole concept of a debt ceiling is nonsensical for a currency-issuing government and just wastes the parliament’s time in deliberating about it, the Labor Opposition is trying to pretend there is something bad about the government’s move.

In doing so, the Labor Party has demonstrated that it no longer deserve office. They should learn a thing or two about macroeconomics before they offer themselves up for election again.

The Shadow Treasurer humiliated himself when he told the press yesterday:

Australians aren’t able to get new mortgages or credit cards without submitting their personal financial information for scrutiny, so it’s a bit rich for Mr Hockey to take the public credit card to half a trillion dollars without updated budget estimates … He’s asking Australians to blindly tick off a $200 billion increase in the nation’s credit card limit without showing them why.

1. Australians are users of the currency and have to fund all spending. The Government issues the currency we use.

2. A currency-issuing government doesn’t have a credit card – it creates its own credit with a stroke of the computer keyboard. It has an elaborate accounting system that makes it look as though it needs to borrow to spend. But all the government is doing is borrowing back funds it spends into existence in some prior period. Government spending funds the bond buyers!

3. While the raft of voluntary constraints that surround government spending are unnecessary and a waste of time, the fact is that as the scale of the economy increases (population size, light a full-size, volume of production, etc) the level of public debt will also scale up given the convention that the government matches its daily deficit with debt-issuance.

The budget deficit is a flow – every day the government is injecting more dollars into the economy to fund private wealth accumulation than it is taking out. The stock implications of that, given these voluntary arrangements, is an increasing level of public debt.

Even mainstream economists know that it is stupid to focus on a level that scales with other aggregates in the economy. Even using their logic, one would only consider the ratio of debt to the size of the economy as the object of attention.

That is why, even in conservative logic, the notion of a debt ceiling should not be the focus of attention.

The third party in Australian politics – The Greens – once again demonstrated they are just neo-liberals on bikes” when it comes to macroeconomics. They are also posturing over the debt ceiling issue – thinking they should play hard ball with the government.

Like the Labor Party they are just humiliating themselves.

Their leader told the press:

The Greens will not support an increase in the debt ceiling to $500bn without more information on the state of the nation’s finances and a clear rationale from the Coalition as to why the increase is needed … We will join Labor to support a more reasonable increase to $400bn if the government refuses to come clean on the details to justify their massive increase in the debt limit.

Why didn’t she say:

1. There is a massive wastage of labour in Australia which means that aggregate demand is deficient.

2. The private sector is reluctant, for good reasons, to accumulate more debt, given that before the GFC households went crazy and pushed the private debt ratio to unsustainable levels.

3. The external sector, despite the record commodity prices over the last decade which spawned the mining boom, is still in deficit (of some 4 per cent of GDP), and that means it is draining aggregate demand from the domestic economy and undermining growth.

4. Once we understand the macroeconomics of the the situation we have to conclude that the budget deficit is currently too small by at least 2 per cent of GDP and that the government needs to introduce a significant fiscal stimulus targeted at job creation.

5. As Greens, we want any economic growth to be environmentally sustainable and suggest that large-scale public sector job creation schemes would be a very desirable way in which to reduce the massive wastage of light in Australia without endangering our fragile natural environment. Indeed, there are hundreds of thousands of jobs waiting to be funded in areas such as environmental care.

6. Given that, it is nonsensical for any political party to oppose the increase in the debt ceiling.

7. In relation to the debt ceiling, we would note that it is a purely voluntary constraint imposed by government on itself, which reflects the logic that provided the fixed exchange rate system that was abandoned by the world in 1971. It is totally unnecessary and we would rather see the government move to a system where it stops issuing federal debt altogether. The issuance of debt in a fiat monetary system is just an elaborate system of corporate welfare for the parasitic financial sector. We implacably opposed it as progressives.

That would have been the appropriate response from a national political party that purports to be the progressive voice in our society. Instead, they lapse into neo-liberal macroeconomic mumbo-jumbo, that they neither understand nor, when pushed, agree with.

Conclusion

Those geologists out in the Pilbarra surely are having more fun despite the heat than all us economists.

That is enough for today!

(c) Copyright 2013 Bill Mitchell. All Rights Reserved.

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    This Post Has 6 Comments
    1. Consistent with the government’s flawed perspective, it would be better to raise the (so called) debt-limit at this time by the entire amount projected for a three year time-span (i.e. its term of office) than to do so incrementally over successive years. And the political reason is fairly obvious. To be seen to do so in year three would hand its political opponents a powerful weapon in the run-up to the next federal election.

      They opposition could point to the failure of the government to meet its promise, prior to the start of its term of office, to lower federal public debt. And in addition they could point to the rank hypocrisy of the Coalition in using the phony argument that the Labor government had been spending like a drunken sailor and “wasting the taxpayers’ money”. You are undoubtedly familiar with all of the sordid rhetoric and the lies — I don’t need to repeat it.

    2. Bill,

      I suggest you take a look at the UK if you want an example of how to run an economy properly. Today we are celebrating the fact that we have only 2.47 million people unemployed, youth unemployment of just under a million and 1.46 million people in part time work because the hours are not available. The 8 million people classed as economically inactive don’t count as they aren’t in the figures. Out of site out of mind.

      I look forward to your blog post lauding the UK in leading the developed world in such concepts as food banks and benefit sanctions. We are leaders at producing artificial scarcity in such markets as electricity meaning millions are in fuel poverty and many have to choose between heat and eat. As to some random woman from the UN condemning the UK for attacking poor people with the bedroom tax I look forward to you putting her in her place.

      I am truly blessed to be a citizen of a country based on milk, honey and compassion.

    3. I’ll be more than happy with Neoliberal economics as soon as they can produce proof that reducing spending will increase income. Until that happens the elites, the politicians, and any other worshippers of the Neoliberal myths can all go %$^& themselves.

    4. This may mean war, Bill.

      Carefue! If y’all run yer debt through YOUR fiat ceiling, it may fall off the edge of known reality, and land on top of ours up here in the Northern Hemisphere.

      Then the axis of declared evil might reverse, and we’d be at war before the Middle Class knew what didn’t hit it, but were conditioned to accept did. :(

      We’d have to retaliate by throwing OUR fiat debt through OUR fiat debt ceiling. And don’t think our Pentagon isn’t way ahead on trans-rational targeting of TRFD policy missiles, either!

      Anything y’all can do, we can do dumber. And we aim to too!!

    5. Can you please edit this: But all the government is doing is borrowing back funds it spending into existence in some prior period.

      Thanks

    6. “The issuance of debt in a fiat monetary system is just an elaborate system of corporate welfare for the parasitic financial sector. We implacably opposed it as progressives.”

      I think I’ve got it but here’s the bit that confuses me. Let’s say we do away with the whole reserve banking debt issuance system and credit bank accounts for spending. How do interest rates work in that scenario?

      As per your enlightening articles on deficit spending and the operations of the reserve bank, I see how the overnight rate can be whatever target desired. Am I right in saying that setting the interest rate floor above zero effectively ensures a steady increase in the financial assets of a commercial bank with a reserve account (provided the government is not running a surplus on that day)?

      Does this guaranteed interest earned effectively represent “free financial assets” to the commercial banks that becomes corporate welfare? Does removing debt issuance and spending directly eliminate a needless base rate, therefore ensuring that any requirement to be in deficit is fully funded by government spending on productive ends, rather than paying interest for no reason?

      I ask because I’m seeing a lot of anger at the huge public debt and QE strategies from the US, UK, Europe and Japan, and even though some peopel seem to go off the deep end suggesting it’s all a conspiracy to eliminate the middle class, there does seem to be an agreement from all sides that the debt issuance is overwhelmingly “good news” for the commercial bankers.

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