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.

The Premier hasn’t forsaken sugar-coating altogether. He said the deficit next year is estimated at $1 billion.

But that’s only the operating deficit. It doesn’t include all the infrastructure spending and equity contributions into government businesses. To repeat, the cash deficit next year will be $1.7 billion not $1 billion.

The situation we were facing prior to the pandemic was not one that could be attributed to one party or another. It’s our collective problem. Politicians have failed us by neglecting to understand, let alone explain.

Commentators have failed us by glibly cut and pasting media releases rather than looking at source documents.

Treasury’s recent report on fiscal sustainability outlined four scenarios. Every scenario showed spending more than revenue in every year from 2020-2021 onwards. Every year required more borrowings. The gaps are even wider now. For every scenario outlined by Treasury, no matter how low interest rates are, interest needed to be capitalised.

Our current revenue sources are not coping. When the economy grows, taxes don’t keep pace. When the economy slows, tax collections slow even further.

It would be difficult to design a worse tax system. It is inequitable and unfit for purpose. Yet Mr Gutwein is not contemplating changes.

He was right to rule out selling government businesses. It’s a silly suggestion. The two largest, Hydro Tasmania and TasNetworks, are both heavily indebted, with a combined book value of only $2.8 billion, about the same as the government’s cash deficits in the next 14 months. Then what?

Some observers have suggested increasing GST is the answer. Increasing the price of goods and services at a time of plummeting demand will cause demand to fall even further.

Downsizing the public service would also be a dumb move.

With such a precipitous crash in the private sector, government spending, both consumption and investment spending, is crucial for the economy.

Government consumption means more nurses, teachers, frontline workers etc. We clearly need them. Investment spending means infrastructure and the like. One person’s spending is another's income.

Without more government spending, incomes will fall further, leading to a continuation of the downward spiral.

The critical key for Tasmania in the short-term is to find out what specific purpose grants and national partnership payments will be forthcoming from the Australian Government.

The Premier’s update made no assumptions. That’s why our State Budget is being delayed until after the Australian Government Budget scheduled for October.

Many of the ills that have beset Tasmania are common across the nation. Asset speculation and financialisation drain the real economy.

Our universities have become property developers, airports have become highly geared carparks, franchising has created a new feudal system with wage theft, particularly involving overseas students lured here to prop up universities, all cheered on by the retail and property lobbies unconcerned about how unbalanced our economy has become.

In the longer-term a complete overhaul of the federal system is the only solution for Tasmania.

There is an urgent need to adopt a more nuanced view of government debt. Naysayers say money doesn’t grow on trees. If money doesn’t grow on trees, where does it come from? The Bank of England believes most money is created when bank loans are made. If a governmentowned bank, the Reserve Bank (RBA) makes a loan to the government, money is created. Government spending increases private assets. On the other side of the ledger, the in-house loan

— whether eventually repaid or forgiven doesn’t matter — increases the nation’s equity.

We need a federal system where states have access to the same banking facilities as does the Australian Government. With an Australian Government predisposed to austerity, state governments will need assistance to deliver services at the coalface to stave off recession.

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.

(Published in The Mercury on 18th May 2020)