This morning, I declared that I was angry on a multitude of levels. I am part of a local community group that is fighting greedy developers, corporate real estate speculators and a compliant local council over an outrageous abuse of planning. That really gets me mad. NSW, the state I reside in mostly, just re-elected a corrupt conservative government, largely because the former leader of the Labor opposition couldn’t keep his hands out of the clothing of a female journalist and his successor mouthed off about Asians taking our jobs. Bloody hell, the Labor Party had it won, and then lost it. Angry. Then we go a little higher in the hierarchy to the fiscal statement (aka ‘The Budget’) which the conservative Australian government brought down last night. And outrageous piece of chicanery and economic malpractice. What is worse is the head of the Federal Opposition’s policy think tank – the John Curtin Research Centre – put out an Op Ed late last week accusing the Conservative government of not doing enough to “address debt” and shirking “serious, structural repair” and not having a public “debt ceiling”. What the F&*k! Did the IMF write this piece? The ‘think tank’ claims it is a “social democratic think-tank dedicated to developing ideas and policies for a better Australia”. Yes, folks that is what social democracy means in Australia – neoliberalism! More on the fiscal statement in what follows. And if I wasn’t already hugely mad enough with all of that, I read that the British Labour Party is desperate for Britain to stay in the Single Market – lock-stock-and-barrel. What! This is the most advanced expression of neoliberalism. I guess it is consistent with their ridiculous ‘Fiscal Credibility Rule’ that keeps the current Labour Party firmly in the Blairite tradition – scared to death of those creeping, amorphous financial markets and so lacking in confidence that they hang on to the grim lies that Dennis Healey introduced to Labour narratives in the mid-1970s. Mad as hell about that! And then we get to Brexit central. The people voted in a majority to LEAVE! It was a correct decision for the long-term, progressive future of Britain. The cosmopolitan liberals couldn’t cope with the idea of, maybe, having to queue up at the border of the 27-nation European Union when they go on their next ski holiday. Their answer – vilify the voters who knew the EU was the exemplar of neoliberalism and do everything to stop the departure. Enter a totally incompetent Tory government to oversee the departure and you get an almighty mess. For once I agree with the former Bank of England governor – Britain should get out next week with no deal and announce a major fiscal stimulus to keep the economy moving while adjustment occurs. So I am glad I have a full head of hair! Then I read another plethora of anti-MMT pieces and my humour improved. A bit of comedy is always important!
Background to last night’s fiscal statement
1. Australia’s GDP growth rate was 0.2 per cent in the December-quarter 2018 and falling fast – see Australia national accounts – growth plummets, per capita recession (March 6, 2019).
The only things driving growth has been declining household consumption growth and some state government public infrastructure projects. The former is declining sharply now because of flat wages growth, record debt levels and falling wealth on the back of plunging real estate prices.
The latter is finite and will exhaust soon.
Business investment is lagging.
2. Australia’s labour market is weak with employment growth regularly around zero, a bias towards casualisation, and an unemployment rate stuck around 5.2 per cent and underemployment around 8.5 per cent – see Australian labour market – weakness continues, January was a blip (March 21, 2019).
3. The total labour underutilisation rate (unemployment plus underemployment) has been around 13 per cent for some years now. . There were a total of 1,748 thousand workers either unemployed or underemployed.
4. Australia’s participation rate is below the pre-GFC levels as is the Employment-to-Population ratio.
5. Over the course of the current cycle (since February 2008), teenagers have lost 96.1 thousand full-time jobs (net).
6. Wages growth is at record low levels and real wages growth has been flat to negative over the last several years, while corporate profits have boomed – see Reliance on household debt and a lazy corporate sector – a recipe for disaster (September 6, 2018).
7. In the March-quarter 2016, the wage share was 55.2 per cent. By the June-quarter 2018, it had fallen to a low of 52.2 per cent.
8. Australian households are carrying record levels of debt, while real estate prices are plunging (around 10 per cent falls in last year). Recent ABS data shows that “Household wealth (net worth) decreased 2.1% in the December quarter 2018, driven by real holding losses on land and dwellings, and financial assets” (Source).
9. The unemployment benefit payment has not adjusted in line with poverty line estimates for some years and recipients are being forced by both sides of politics to live well below the accepted poverty line.
See – ‘Progressive’ groups in Australia captured by neoliberal ideology (September 18, 2018).
10. Australia’s external sector remains in deficit, as it has been since the 1970s, averaging around 3.5 per cent of GDP, which means that if the government sector runs a fiscal surplus or a deficit below 3.5 per cent of GDP, the private domestic sector must be spending more than it receives overall.
11. A major policy initiative of the previous government – the National Disability Insurance Service – which aimed to fund items as basic as wheelchairs for families who cannot afford them – has been severely underfunded by the current Federal government who put a cap on the public employees who would support the scheme. Long delays have resulted in people not being able to access any funding or support.
The government has held back the ‘underspend’ and claimed it against their fiscal bottom line (which has been moving towards surplus).
12. Inflation is persistently below the Reserve Bank’s lower targetting bound and shows no signs of increasing.
13. The most recent data shows that the Federal government fiscal balance has shifted from a deficit of $A10.1 billion (0.5 per cent of GDP) to an estimated deficit of $A4.2 billion (0.2 per cent of GDP) between 2017-18 and 2018-19 (end of period is June).
It is estimated by the Government to record a surplus of $A7.1 billion (0.4 per cent of GDP) in 2019-20.
Look back over the 13 background facts and ask yourself which is the outlier.
Facts 1-12 are all directly related to Fact 13, which is what I want to talk about next.
The fiscal statement – consider these graphs
Consider the following graphs. They are two different views of wages growth in Australia, which is now at record lows in relation to the preferred Australian Bureau of Statistics measure the Wage Price Index.
The first graph the actual annual growth (blue bars) since the 1998-99 financial year up until the present period (the 2018-19 bar in green is the average of the September and December quarters only).
Actual wages growth has been trending down for several years now as the impact of the sustained levels of labour underutilisation take their toll.
The red bars are the estimates and projections in Statement 2: Economic Outlook – published on Tuesday by the Government.
The Government wrote:
As economic growth strengthens and spare capacity in the labour market continues to be reduced, wage growth is expected to pick up to 23⁄4 per cent through the year to the June quarter 2020 and 31⁄4 per cent through the year to the June quarter 2021. Growth in the Wage Price Index was 2.3 per cent through the year to the December quarter 2018, its equal strongest outcome in more than three years.
Note also that the Government is projecting that the unemployment rate is set to remain at 5 per cent out to 2020-21, which is well above the pre-GFC low of 4 per cent.
And the participation rate is projected to be constant over the period to 2020-21 – again this is a depressed forecast.
While the fiscal estimates make no projections about underemployment, it remains a huge problem in Australia and is likely to remain high over the projection period.
Considering the facts I presented at the outset, the reasonable question is: Why will the Wage Price Index recover so strongly and so quickly?
The reasonable answer is that it will not – the dynamics are just not going to be there.
The second graph shows the Wage Price Index itself (since 2010-11). The red line is the fiscal projections for the wages growth, while the blue dotted line is a reasonable projection based on recent growth (with no material change in labour market conditions projected).
You can see there is a credibility issue here in terms of this key Government projection.
Why does this matter?
Consider the following graph, which shows government payments and receipts as a percentage of GDP from 1970-71 out to 2022-23
The dotted segments are the fiscal statement projections.
You can see that while payments are projected to fall to 24.5 per cent of GDP, receipts are projected to rise from the current 24.2 per cent to 25.4 per cent in 2021-22 and drop back to 25 per cent in the final year of the projections (2022-23).
Hence the projected fiscal surplus in 2019-20.
Even though the Government is offering tax cuts to individuals and corporations, it is still forecasting solid taxation receipts in the coming years.
This is based on two key projections:
1. The (unbelievable) projected rise in wages growth (as noted above).
2. Unrealistic real GDP growth forecasts – expected to rise to 2.75 per cent by 2020-21 despite the current annualised growth rate being 0.8 per cent.
Will any of that happen? Not likely.
Which means the fiscal estimates are just political artifacts designed to win a nearly unwinnable election and have little grounding in reality.
Regressive Tax Cuts and Trickle Down returns
The electioneering in the fiscal statement is clear.
First, not much has been said of the plan to virtually flatten progression in the income tax system.
The Government says it will have a lowest tax bracket of 30 cents in the dollar in place by 2024 and that 94 per cent of all workers will be in that bracket – earning between $A45,000 to $A200,000 per annum.
What does that actually mean?
The Treasury Department has provided a – Tax relief estimator – which allows us to make some calculations which are shown in the following Table:
Conclusion: The flattening of the tax structure will deliver massive benefits to the high income cohorts and the lower income workers will get very little relief at all.
The fiscal system becomes much more regressive as a result of this flattening. And there are no fiscal measures likely to offset that increased tax regression on the spending side.
The Government is also claiming that these tax cuts will drive growth.
Remember ‘trickle down’ economics.
These tax cuts are unlikely to increase labour supply (one of the tenets of supply-side trickle down) but they are unlikely to boost overall spending much, given the big winners have much lower marginal consumption spending propensities
Further, the claim that it is better to get the tax cuts than a wage increase are flawed even in basic arithmetic.
A given percentage tax cut delivers much lower income boost to workers than a similar increase in wages.
These tax cuts will not redress the damage that the flat wages growth is bringing.
The contractionary bias
The fiscal statement released last night by the Treasurer has the following forward estimates for the fiscal balance as a percentage of GDP. The graph starts in 2000-01 and goes to 2023-23
The red bars are the latest projections from the current Government as outlined in Tuesday’s statement.
The fiscal deficit is projected to fall from $A10,141 million in 2017-18 to $A4,162 million in the current financial year (2018-19). By 2019-20, a surplus is estimated of some $A7,054 million, increasing thereafter.
The Treasury estimates show the government will increasingly reduce its contribution to growth in the remaining years of the forecast period until 2022-23, when the fiscal surplus is projected to be 0.4 per cent of GDP.
The fiscal shift from one year to another is the change in the fiscal balance as a percentage of GDP changes. It is the result of two factors – the fiscal balance itself (in $As) and the value of nominal GDP (in $As).
The following graph shows the recent history (from 1970-71) of fiscal shifts up to the end of the projection period (2022-23).
The biggest fiscal swing in the previous conservative government’s tenure was in the financial year 1999-2000 (a shift of 1.4 per cent).
A sharp slowdown in the economy followed that contraction and the fiscal balance was in deficit two years later (2001-02).
The Australian economy only returned to growth because the Communist Chinese government ran large fiscal deficits themselves as part of their urban and regional development strategy. That spurred demand in our mining sector.
The largest fiscal shift in the sample period shown was the second-last fiscal statement from the previous Labor government in 2012-13 which was equivalent to 1.7 per cent of GDP. They prematurely withdrew the fiscal stimulus bowing to the assault from the neo-liberal press and commentariat about the dangers of deficits. It was a moronic and damaging retreat.
A major slowdown followed and dented the recovery from the GFC that had been spawned by the fiscal stimulus in the previous two years.
That Labor government was obsessively trying to achieve a fiscal surplus in 2013-14 and was blind to the reality that the private domestic sector was not going to fill the spending gap left by the retrenchment in net government spending.
The result – which was totally predictable – the economy took a nosedive, tax revenue fell even further and the fiscal balance moved further into deficit with unemployment rising.
The current conservative government was elected in September 2013 (and subsequently reelected in September 2015).
In Tuesday’s fiscal statement, the forward estimates imply a continued tightening of fiscal policy (red bars) although the 2017-18 shift of 1.3 per cent of GDP was very damaging.
The fiscal shift in the current year (2018-19) is projected to be 0.3 per cent of GDP, and this increases in the following year (2019-20) to 0.6 per cent of GDP, then 0.2, 0.3 with some easing prjected in 2022-23 (smaller projected surplus).
With a slowing economy overall, record levels of household debt and flat wages growth starting to impact on household consumption spending and business investment still floundering this level of fiscal drag is unsustainable.
Unless there is an extraordinary pick up in private spending or net exports then the economy will not achieve the underlying growth assumed the Government will not achieve these fiscal projections.
The problem is that in trying to achieve them, they will inflict further damage on an already weak economy.
Taking the basic facts I listed at the outset as a whole, the obvious conclusion is that there needs to be a fiscal deficit of more than 2 per cent of GDP right now and that should be sustained into the future period (indefinitely).
As I show next, that will help the private domestic sector reduce its unsustainable debt exposure, which is now driving the slower growth in household spending.
The private sector’s debt position is set to worsen
The economic predictions, which underpin the fiscal statement and are contained in Budget Paper No.1, show that the Treasury is forecasting the following outcomes:
1. The fiscal deficit for 2018-19 of just 0.21 per cent of GDP reducing a surplus of 0.4 per cent of GDP in 2019-20, a surplus of 0.5 per cent, 0.8 per cent and 0.4 per cent of GDP in the subsequent years in the projection.
2. The current account deficit is projected to be 1.75 per cent of GDP in 2018-19, rising to 2.75 per cent of GDP in 2019-20, and 3.75 per cent of GDP in 2020-21. The average current account deficit since fiscal year 1974-74 to 2016-17 has been 4 per cent of GDP. It is hard to see how the current year’s estimate will be achieved.
So what does that all mean in terms of the sectoral balances?
We know that the financial balance between spending and income for the private domestic sector equals the sum of the government financial balance plus the current account balance.
The sectoral balances equation is:
(1) (S – I) = (G – T) + CAD
which is interpreted as meaning that government sector deficits (G – T > 0) and current account surpluses (CAD > 0) generate national income and net financial assets for the private domestic sector to net save (S – I > 0).
Conversely, government surpluses (G – T < 0) and current account deficits (CAD < 0) reduce national income and undermine the capacity of the private domestic sector to accumulate financial assets.
Expression (1) can also be written as:
(2) [(S – I) – CAD] = (G – T)
where the term on the left-hand side [(S – I) – CAD] is the non-government sector financial balance and is of equal and opposite sign to the government financial balance.
This is the familiar MMT statement that a government sector deficit (surplus) is equal dollar-for-dollar to the non-government sector surplus (deficit).
The sectoral balances equation says that total private savings (S) minus private investment (I) has to equal the public deficit (spending, G minus taxes, T) plus net exports (exports (X) minus imports (M)) plus net income transfers.
All these relationships (equations) hold as a matter of accounting.
The following graph shows the sectoral balance aggregates in Australia for the fiscal years 2000-01 to 2022-23, with the forward years using the Treasury projections published in ‘Budget Paper No.1’.
The vertical black line demarcates the actual from the projected data. I have assumed that the external position in 2021-22 and 2022-23 will be the same as the Government’s estimate for 2020-21.
All the aggregates are expressed in terms of the balance as a percent of GDP.
So it becomes clear, that with the current account deficit (green area) more or less projected to be constant over the forward estimates period, the private domestic balance overall (solid red line) is the mirror image of the projected government balance (blue line).
In the earlier period, prior to the GFC, the credit binge in the private domestic sector was the only reason the government was able to record fiscal surpluses and still enjoy real GDP growth.
But the household sector, in particular, accumulated record levels of (unsustainable) debt (that household saving ratio went negative in this period even though historically it has been somewhere between 10 and 15 per cent of disposable income).
The fiscal stimulus in 2008-09 saw the fiscal balance go back to where it should be – in deficit. This not only supported growth but also allowed the private domestic sector to start the process of rebalancing its precarious debt position.
That process has been interrupted by the renewal of the fiscal surplus obsession since 2012-13.
You can see the red line moves into surplus or close to it. The long-run average private domestic deficit is 2.4 per cent of GDP and was achieved largely when the household saving ratio was between 10 and 16 per cent and private investment in capital formation was strong.
That was a sustainable position because the capital investment was boosting GDP growth and providing returns to keep the debt in check.
The fiscal strategy outlined by the Government last night continues the trend – as the graph shows – for the private domestic sector to once again to be accumulating debt as it progressively spends more than its income.
The growth strategy of the Government, even if they will not admit it, is to rely on squeezing the liquidity of the non-government sector and forcing the latter to accumulate increasing debt commitments in order to maintain spending.
That is exactly what we saw before the crisis – growth becomes reliant on private debt buildup.
The whole nation is transfixed on fears that the government debt in Australia is too high – courtesy of all the scaremongering that has been going on. But nary a word gets mentioned about the dangerous private debt levels.
The reality, however, and this is now being revealed by the national accounts data, is that household’s have probably reached their limits for credit, and, combined with the flat wages growth and falling wealth, have started to rein in their consumption spending growth.
In other words, the Government’s strategy will fail – badly.
I haven’t had time to write about the climate change issues in the Government’s fiscal strategy. Suffice to say they are basically climate change denialists.
I also haven’t written about the unemployment benefit scandal.
Nor have I said anything about the appalling responses from the Opposition Labor Party – about how the projected surplus is not big enough etc.
The foresight of the Government and the care for the people it is elected by is severely exposed in this fiscal statement.
It has been framed to improve the election prospects of the Government and has limited economic coherence.
I am really angry about it.
I guess I will now tune into the British Brexit news!
That is enough for today!
(c) Copyright 2019 William Mitchell. All Rights Reserved.