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.
