Sunday, 24 May 2020

Recovery bonds

How governments address funding  of the forthcoming fiscal stimulus  is yet to be seriously tackled. My last blog Staving off recession concluded with the observation:

The future will be one where if governments aren’t directly funded by the RBA, the RBA will own some government debt. And that should include State government debt. Money owed to ourselves won’t be a burden. It’ll be our salvation.

Bill Kelty former Australian Council of Trade Unions (ACTU) secretary and former Reserve Bank board member, was reported to be working on a recovery plan.

Tuesday, 19 May 2020

Staving off recession

WITH the release of the Economic and Fiscal Update Report on Friday, Premier Gutwein didn’t try to sugar-coat the economic reality the state is facing. But he persisted with the myth that he had fixed the budget prior to COVID-19.

The government’s own Revised Estimates Report in February painted a very bleak picture. Cash deficits for this year, 2019-2020, and the next three years were estimated at $1.8 billion.

The latest update shows how much the situation has deteriorated in three months.

This year spending is expected to exceed revenue by $1.2 billion. Next year, 2020-2021, the cash deficit is projected to be $1.7 billion. This year we’ll spend $1.19 for every $1 in revenue. Next year the figure will be $1.29.

Tuesday, 12 May 2020

Don't forget the States


All the post Covid-19 recovery talk centres on the Commonwealth government’s fiscal position and its unprecedented deficits for the foreseeable future.  How are States going to fund their share of the required spending? Hoping the current Commonwealth government will continue to run deficits to help fund State budgets seem somewhat forlorn at this stage.

The Commonwealth provides 40 per cent of State government revenues with approximately half of that coming from GST. Local governments receive 10 per cent of their revenue from the Commonwealth, not directly, most comes via the States.

The Commonwealth government being in control of the currency, with a central bank (RBA) to assist, and with fiscal policy that raises over 80 per cent of the nation’s taxes, can easily attend to its own needs. If it wasn’t for the States that is.

State government do not have the same flexibility as the Commonwealth and are more inclined to austerity. Erring on the side of austerity is likely to make any recovery slower and more painful for all those affected, potentially scarring a whole generation.

Where the money will come from in the case of State governments needs to be addressed at the same time as for the Commonwealth.

We need a plan for the Federation.

The starting point for a discussion about any entity’s future must include an understanding of existing balance sheets. If that entity is a country then it must include an understanding of the nation’s balance sheet, its assets and liabilities.

The only balance sheet item that gets mentioned is the debt figure for the Commonwealth. In other words, the level of borrowings of the general government sector. So, we’ll start by having a look at the balance sheet for the Commonwealth General Government. This will lead to a look at the consolidated balance sheet for the Commonwealth, which includes government businesses, particularly its wholly owned bank, the RBA. It is crucial to include the RBA in any discussion about Commonwealth finances.

The consolidated balance sheet leads to a closer look at the Commonwealth’s debt and borrowing, how spending, money creation, debt and QE (quantitative easing) impacts the Commonwealth’s balance sheet. Understanding the mechanics of the system must be a prerequisite for policy making.

A more nuanced view of debt will lead to a look at the consolidated balance sheet for the nation’s public sector. It is only with a more realistic view of debt that the Federation’s problems can be properly addressed.  The Commonwealth/RBA needs to allow States greater access to the RBA to organise debt and spending in the same way as is possible for the Commonwealth. If the government via the RBA can provide liquidity to private banks by acquiring their assets, if the RBA can led $90 billion to banks at 0.25 per cent to onlend to SMEs because the banking system is not up to the task, it can provide liquidity to States by acquiring their bonds. QE for States with RBA holding State government bonds will mean the overall total public sector debt need not produce insomnia for policy makers or burden our grandchildren.

Thursday, 9 April 2020

Where's the money coming from?

If the government borrows from its own bank, the Reserve Bank (RBA), when the money is repaid, it is repaid to itself. It is simply an institutional arrangement transferring funds from one pocket to another.

Monday, 17 February 2020

Will Hodgman's legacy

The first task of the Hodgman government when it won the 2014 election was to request Treasury to report on State finances. The subsequent report, Analysis of Budget Risks, in April 2014, was essentially an update of the Revised Estimates Report for the 2013/14 year prepared in February 2014.

Budget reports always cover a four-year period, the budget year plus three years of forward estimates. The April 2014 report noted by the end of the forward estimates the  State was facing net debt of $400 million. The deterioration in net debt over the four-year period was $600 million. Net debt increases when spending is greater than receipts. Cash deficits totalling $600 million were projected over four years.

After whipping up outrage at the incompetence of the previous government, then Treasurer Peter Gutwein reassuringly told Parliament on 8th May 2014: “We are committed to fixing the Budget”. Will Hodman’s resignation speech of 14th January 2020 made the claim that “….we have delivered our plan…to manage our Budget, taking it from deficits to surpluses.” The release this week of the Revised Estimates Report for 2019/20 makes now a convenient time to check.

Saturday, 15 February 2020

Revised Estimates Report shows problems ahead

The government’s cheer squads are not quite as raucous as they once were.

There’s a growing awareness that all is not well with Tasmania’s fiscal position. The Revised Estimates report for 2019/20 released this week confirms the State’s vulnerabilities.

Needless to say Premier and Treasurer Gutwein was unwavering in his claim that the government fifth surplus in a row “means more money to invest in essential services that Tasmanians need”. This is a complete untruth. The surplus as measured by Mr Gutwein doesn’t provide more money. Only a cash surplus does.

Friday, 7 February 2020

A new approach to fiscal policy

It’s been twelve years since the global financial crisis brought the world’s economy to its knees. However, after the greatest setback since the Great Depression of the 1930s, there’s little evidence remedies are working.

At the Federal level the government is determined to produce cash surpluses, a supposed indicator of responsible economic management. Yet cash surpluses mean draining more out of the economy by taxation than is returned by spending. When an economy is weak, wages flat, unemployment and under-employment a growing problem, and State governments all struggling to fund services, taking more out of the economy is unlikely to resuscitate the patient.

At the State level the government pretends it is running a surplus when it clearly spends more than it receives.  The government uses the word ‘surplus’ to describe its Net Operating Balance figure. But as its name suggests, this only includes recurrent operating spending, and omits capital spending and equity contributions into government businesses. It’s a misleading measure of the government’s fiscal position.

Shadow Treasurer David O’Byrne ridiculed the government claims of being able to achieve a surplus but in so doing gave tacit approval of the government’s version of a surplus as a desirable goal. It’s not. The unassailable reality is that Tasmania will be running cash deficits for the foreseeable future. There is no alternative. To do otherwise would be grossly remiss. To pretend it’s not is misleading. To continue to conduct an adversarial political exchange on a false premise is derelict. The public discussion should focus on how to fund the inevitable cash deficits of the State government. It’s not a problem unique to Tasmania. It will affect all States.

Saturday, 11 January 2020

Pokie gifts revisited

The economic benefits from breaking up Federal Group’s exclusive license to operate electronic gaming machines (EGMs) in pubs and clubs are an assortment of half-truths and baseless assertions.

Whilst the Federal Group holds an exclusive license, it does so as the lead member of an oligopoly which includes the pubs and clubs which provide premises for EGMs in the community.