You wouldn’t believe it to listen to most of the narrative surrounding the recent Commonwealth Budget, but Australia’s government is in a very strong position to make the investments the country needs to make to build a resilient and sustainable economy.
While the Treasurer will have wanted to avoid doing anything which might be seen to add to inflationary pressures, at a time when the cost of living is rising faster than at any time since the 1980s, comments about the ‘hard yards of budget repair’ were unnecessary, and risk biasing future budgets towards austerity, underemployment and a failure to make essential strategic investments.
There is overwhelming evidence that our current global inflation has its roots in continuing Covid disruptions to fragile supply chains, in the (major) European war, and in what are early harbingers of the unprecedented changes to the global climate, which almost certainly lie ahead of us.
Those who blame inflation mainly on the financial support package during the pandemic ignore the lack of a wage-price spiral in Australia. Despite low unemployment, real wages have been falling and not rising. They also ignore the fact that the size of the economy has just returned to its long-run trend and that the fall in unemployment and labour force shortages are a reflection of the collapse of net immigration in March 2020. If you blame low-interest rates and quantitative easing, remember that the cash rate had already been cut to 0.75% before the pandemic without creating enough inflation to match the RBA’s target since 2014 and that large-scale QE over many years had failed to create inflation in Japan, the USA, the UK or the Eurozone – for a good reason, as it is just an asset swap between the public and private sectors and not ‘free money’.
Commonwealth government net debt and gross debts are only 23% and 37% of GDP, respectively; however, you define the debt as well below the average level for OECD countries and a small fraction of that of the USA or Japan. Even the conventional narrative of what constitutes a sustainable fiscal policy would imply that Australia is far from having an unsustainable fiscal policy, looking many years into the future.
But the conventional ‘government as household’ narrative is misleading. In a monetary system like ours, every dollar the government spends is a new dollar; the role of federal taxes is not to pay for government spending in advance but to delete dollars from the monetary system to create a room within the productive capacity of the economy for the government to spend and invest without creating inflationary pressure; the role of treasury bonds is not to allow the government to borrow, but to drain excess reserves from the banking system, in support of the RBA’s interest rate target.
The government’s net debt is better thought of as the net supply of dollars to the private sector than as a debt in the conventional sense. Our government does not need to borrow back the currency it issues at all, in the conventional sense of the word. It does not need to balance the books, and that is not an appropriate objective.
So what would this economist recommend Jim Chalmers to do in future budgets? By all means, be careful not to add to inflationary pressures when the economy absorbs the consequences of what feels like the four horsemen of the apocalypse. But when the global economy slows, and if peace returns to Europe, as the impact of COVID in China and elsewhere across supply chains ebbs, as net migration adds to labour supply, and as energy and food prices start falling, global inflationary pressures will fall too, and additional excess capacity will open up in the Australian economy.
If we want a modern, sustainable economy, with an accelerated shift to renewables, other investments in a more rapid move to a net zero economy and in defending our remaining biodiversity, in improved aged care, healthcare, education and training and public services generally, and in the scientific research needed to address the major challenges of the decades to come, then it will be a mistake to leave workers and other real resources which could have contributed towards this mission underemployed because of a mistaken view of fiscal strategy.
The Commonwealth government can spend too much, relative to the taxes it collects, and contribute towards inflation. But it can never run out of the currency it issues. The barrier to spending is always current and expected future productive capacity. The challenge is to maintain and enhance that capacity to build a well-being economy without damaging the natural environment on which we all depend.
The priority should not be ‘budget repair’ in future budgets – there is nothing in the budget which needs repairing – but the maintenance of low, stable inflation while planning for technological development, social well-being and ecological sustainability.
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