A decade ago, and years before Treasurer Josh Frydenberg promised a budget that was “back in the black”, Prime Minister Julia Gillard promised the same thing.
At that time, in the lead-up to the 2012 budget, unemployment was higher than it is today, and inflation and wages growth were so low (1.6% and 2.3%, respectively) as to provide no impediment whatsoever to cutting unemployment further.
Yet Gillard was resolute in her determination to bring in a budget surplus, by which she meant a budget that spent less than it took in.
She titled her speech to Western Australia’s Chamber Of Commerce and Industry and Chamber Of Minerals And Energy “In the Black”
In the Black, Prime Minister Julia Gillard, April 19 2012.
There was “no clearer sign of a strong economy than a surplus”.
It would “protect jobs”, provide a “buffer in case the global economy gets worse”, and allow the Reserve Bank to cut rates, “knowing that an interest rate reduction is good for families and business”.
Indeed, she added:
…let me make this clear once and for all: a budget surplus is not a political target but a potent economic tool.
I sometimes wonder whether she remembers this claim. I nearly asked her once, crossing North Terrace in Adelaide, but I chickened out.
As with Gillard, so with Abbott
Gillard never did get her budget surplus, and she and Kevin Rudd were followed as prime minister by Tony Abbott, who talked of a “budget emergency” that only a run of surpluses could fix.
While in opposition, his finance spokesman Barnaby Joyce had gone as far as to suggest that the debt run up by years of budget deficits (spending more than the government took in) was “getting to a point where we can’t repay it”.
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That was too much even for Abbott, who dumped Joyce as finance spokesman a month later.
Neither Abbott nor his successors Malcolm Turnbull and Scott Morrison ever did get a surplus, although Morrison came close in 2018-19.
The deficits and the way they were financed meant net debt continued to rise and rise. But the government didn’t run out of cash.
And when the pandemic struck, borrowing (and having the Reserve Bank create) hundred of billions to support businesses and their employees turned out not to be a problem.
So why did Gillard, Abbott, Turnbull, and for a while Morrison and Frydenberg, have their hearts so set on ultimately unachievable surpluses?
It might be because they didn’t understand how Australia’s money system works. More charitably, it might be because, while they did understand how Australia’s system works, they found it convenient not to pass that knowledge on.
They have been perpetuating the “government as households” metaphor, which ignores the role of the government as a currency issuer as well as a currency user.
In cooperation with its wholly owned central bank, Australia’s government produces Australian dollars. It can’t run out of them.
Budget money can’t run out
The government has good reasons for collecting taxes (to suppress spending that might accelerate inflation) and good reasons for borrowing by issuing bonds (to temporarily withdraw money from the economy). But these don’t include a need to fund its spending.
In truth, every dollar the government spends is a new dollar; every dollar it collects in taxes is a dollar destroyed.
Every bond it sells does nothing more than change dollars into transferable savings accounts at the Reserve Bank.
David Andolfatto, an economist who is vice president of the US Federal Reserve Bank of St Louis, puts it this way:
…it seems more accurate to view the national debt less as form of debt, and more as a form of money in circulation.
What this means is that Gillard was nearly right. She just needed to dump the word “surplus”.
The budget is indeed a potent economic tool. Too much spending without offsetting tax will indeed push up inflation. Not enough spending will keep people out of work and risk a recession.
But how much spending is needed relative to tax depends on the economy.
In 2020 and 2021 a willingness to push out much more money than was taken in supported an economy that would otherwise have crashed, and helped bring about two of the most rapid recoveries from recessions and downturns in history.
Horses for courses
What budgets should do depends on how things are, and if we haven’t learned this by now, we should have.
And what else have we learned? That complex global supply chains can be efficient but not necessarily resilient.
Which means a transition away from petrol towards renewables may have benefits beyond the purely environmental. That preventative health, health care and aged care are more important than we might have thought.
We have have also learned about the limits to the powers of the Reserve Bank.
While governments talked of surpluses, we continued to obsess about central banks using official interest rates to control inflation. When it tried to push up inflation, it couldn’t, until recently.
It might be that just as interest rate cuts were not the best way to stimulate inflation before the pandemic, interest rate hikes are not the best way to suppress inflation afterwards.
Higher interest rates impose costs on businesses.
And they actually increase some incomes, including those of savers and high earners who own products linked to treasury bonds.
When high interest rates can suppress inflation, they are likely to do it by triggering a slide in asset prices, including the price of housing assets, which, with household debt high, ought to give policy-makers pause for thought.
Taxing more and reining in government spending might do it better.
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In any event, withdrawing money from the economy might not be the right thing to do at a time when when high prices are being driven by global events rather than spending at home.
There’s a lot we should have learned in the past decade, much of it set out in modern monetary theory – something the budget papers are likely to acknowledge quietly, if at all.
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