Monday, 17 May 2021

Federal government borrowings are the nation's equity


BUDGETS are a concoction of economics and politics with the mix depending on the electoral cycle.

The latest federal budget appears to have a heavy dose of politics given an election is on the horizon. But what of the economic aspects? What does this budget reveal?

The most welcoming change is the ready acceptance by the government of the need to continue with deficits. The reason there will be public deficits is because the private sector will continue to run surpluses. That’s the iron law of macro-accounting.

Pollies and the commentariat talk about the need for budget repair, implying the public sector needs fixing when the private sector’s predisposition to run surpluses is the flip side of the same problem.

It is normal for households and businesses to strive to be net savers over time, for a rainy day, say. This implies the normal position for a government is to run deficits, especially if the economy is growing. Bob Menzies ran 16 deficits in 17 years in the 1950s and 1960s.

However, over time, rising household indebtedness has increased the amounts required to repay loans. From a national income perspective, income is either consumed or saved or used to pay taxes.

Increased loan payments mean increased savings and therefore less consumption. Increasing house prices and associated mortgages suppresses consumption in the real economy.

Student indebtedness has similar effects. With little or no growth in real wages, paradoxically one of the boosts to consumption comes from borrowed funds made possible by increased home equity.

We are living in a Ponzi world.

At the same time, there has been a conspicuous fall in workers’ share of national income. The amount going to capital owners has increased. Not just old-fashioned capital like machines and buildings but the new variants — licences, permits, goodwill, intellectual property, franchises — all designed to clip the ticket and benefit paper shufflers at the expense of workers. Greater returns to the new capital owners have kept a cap on wage costs, which in turn has led to wage exploitation, insecure work regimes and the influx of workers from overseas which has created as many, if not more, problems as it has solved by extra strains on housing and infrastructure.

Our economy is out of whack. The financial economy is devouring its host, the real economy. There’s little point tackling so-called budget repair if the foundations need fixing.

Why doesn’t the private sector spend more rather than requiring the government to run deficits? There’s not enough demand for their goods and services partly due to the erosion of the workers’ share of the national pie and the system’s incentives to speculate in second-hand assets such as houses and shares rather than investment in the real economy.

Capital gains from shuffling paper are taxed at lower rates than personal exertion income. Share owners wallow in the illusion they are business owners rather than speculators and thus entitled to a refund of company tax via franking credits.

The common good is becoming an outdated concept.

The spectre of increasing government debt that has resulted from deficits has been used to scare the populace into believing that we can’t afford to employ our idle resources to perform much needed and demanded public tasks, and also as an excuse to offload public assets and outsource public services to the private sector, all in the cause of freeing our grandchildren from the burden of excessive debt.

The latest government spin has toned down the rhetoric without a full explanation. It’s easy, as the Labor Party and many commentators have done, to point to the hypocrisy of the government’s backflip, but unfortunately it strongly suggests there’s widespread belief that government debt remains a burden for future generations.

The breakthrough in understanding why government debt is not a problem has come with the move by the Reserve Bank, our bank, to buy much of the new debt. We owe money to ourselves. Accountants have a name for owner’s loans to their businesses. It’s called equity. Accounting 101 students learn about it in Week One.

Government borrowings held by the RBA represent equity in our nation. Even much of the debt held privately will be rolled over at maturity, implying this also is de facto equity in the nation.

A nation without borrowings is a nation with a pretty skinny balance sheet.

Japan’s government debt, relatively speaking, is five times the size of our debt and almost half is owned by the Bank of Japan, the government’s central bank. Nobody believes the debt will ever be paid. It will either be written off or rolled over. The same will apply here.

We are on the threshold of a better understanding of how government financing works.

However, with most other issues in our rapid changing world our political class is still at the remedial stage.

Tuesday, 13 April 2021

Election plans avoid the fundamental issues


THE Liberals swept to power in March 2014 with a proposal to solve Tasmania’s problems.

Someone in the party had discovered the wizardry of an Excel spreadsheet and had shuffled a few numbers in the then government’s four-year budget and pronounced the result a Plan for a Brighter Future.

The cornerstone savings were from a more efficient public service, which meant downsizing by 500 saving $155m over four years.

The Brighter Future was heralded by the proposal to spend $76m in elective surgery to “ensure that Tasmanians stuck on waiting lists for years can get their operations sooner, with up to 15,000 extra procedures”.

As Martyn Goddard observed in these pages on April 2, “When the present government came to power in 2014, there were 7610 people on the statewide elective surgery waiting list. The most recent figure was 12,086, an increase of 59 per cent.”

No doubt hoping that most people might have forgotten previous failed promises, Premier Gutwein has now pledged to spend another $154m over four years to deliver an additional 22,300 elective surgeries and endoscopies.

The more things change, the more they stay the same.

Thursday, 19 November 2020

Budget denialism


WHEN Premier Gutwein undertakes not to sugar-coat the message, you can guarantee that’s what he will do. Introducing the 2020-2021 Tasmanian state budget he said: “This year the deficit will be $1.1bn, before improving to a deficit of $281m in 2021-22. Importantly as our economy returns to growth, there is a pathway back to the black with a return to a modest surplus in 2022-23.”

Announcing “the largest and most significant infrastructure program in the state’s history” then failing to include that spending in the deficit calculation is deceptive. The actual cash deficit for this year will be $2.1bn. In 2021-22 the cash deficit will be $1.07bn followed by $656m the year after. That’s a whole lot different to what the Premier might like us to believe. The Premier uses the generic term “deficit” for the Net Operating Balance figure. As its name suggests the latter only includes operating expenses, wages for instance, not capital outlays, roads and schools for example. This is not a semantic quibble. The point that needs to be understood is that a positive Net Operating Balance does not mean there will be cash surpluses to reverse the growth in net debt. There is little prospect of that occurring any time soon.

“In this budget we will continue to leverage our strong balance sheet to stimulate our economy,” the Premier said. More sugar coating. The balance sheet at June 2020 was the smallest for more than 15 years and it’s about to get a whole lot smaller. By June 2021 the government’s net worth will be $6bn. Of that figure, $4.7bn is the net worth of government businesses. Aside from them the government’s net worth will only be $1.3bn, smaller than the Hobart City Council. So let’s not pretend we have a strong balance sheet when a cursory glance reveals the exact opposite.

Thursday, 5 November 2020

Mending payroll tax


Tasmania’s state budget next week is a wake-up call that our tax system won’t deliver the revenue we need.

Even before COVID-19 the budget was in trouble. For the past three years, spending has exceeded receipts despite a relentless pattern of infrastructure deferrals and underfunding of crucial services.

The recent federal budget sent a clear message that the Feds were content to leave states to fend for themselves whilst they pursued their own plans to direct most budget assistance to private businesses to resurrect the flailing economy.

Encouraging businesses to buy new plant and equipment is ill directed when existing plant is idle due to insufficient demand. A lot of new plant will be labour-saving and sourced from overseas. The stimulus effects will be muted. The jobs recovery is premised on shaky assumptions.

Lower personal taxes are also seen as the way for people to spend more with local businesses. Unfortunately, this misses the crucial point that what a lot of people would prefer is more public goods, like better health, aged care and social housing. Not only that but more jobs will eventuate as the multiplier effects are superior.

All states are facing similar revenue shortfalls. Payroll tax is the largest contributor to states’ taxation revenue, comprising about one-third. The origins, history and the underlying rationale of payroll tax have largely been forgotten as it has evolved to only apply to larger employers at a higher rate.

To make matters worse, the taxable base now includes superannuation contributions as well as ordinary labour remuneration.

If payroll tax is a disincentive to employ, as most people believe, it’s only because a fair and efficient tax has been spoiled by policymakers. It is not a coincidence that the voluminous 2010 Henry Tax Report included payroll tax in the chapter on Consumption Taxes. Despite using labour income as its tax base, a uniform tax on all labour income is a pre-consumption tax. As a tax it is more closely related to GST than most people think. With a low rate it would be fair and efficient.

Thursday, 29 October 2020

Hydro's shrinking balance sheet

 HYDRO Tasmania’s recently released 2019-2020 annual report revealed a significant write-down of generation assets due to reductions in future expected revenue.

The business case for Marinus, the second Bass Strait interconnector, which is based on estimates of future electricity prices, will need to be revised.

Thursday, 8 October 2020

Downturn demands bigger spend


The penny has finally dropped that increased public debt is not a burden, but spending in this year’s Federal Budget should have been better directed.

Sunday, 27 September 2020

UTAS a law onto itself


As published in The Mercury 26th September 2020. It's an abridged re-write of the previous blog Where to UTAS?)

IF annual reports were marked like university assignments, the University of Tasmania’s latest effort would receive one out of 10.

UTAS reports on a calendar year basis. The Auditor General signed off the 2019 report in February. The Board (known as the Council) adopted the report in May and sent it to the government as required. The government released the report in late August, eight months after year’s end. Were it a listed company it would have been suspended.

Apart from the financials it’s a pretty skinny report. The overview for the year occupied only six pages. Even then it contained a cut and paste from a previous offering, a Strategic Plan dated July 2019. UTAS is “not long-term economically sustainable and being economically sustainable is no easy task … At an operating level, we break even. Still, there is no surplus to see our facilities renewed for the next generation.”

The brief review continued with a pastiche of proper nouns and acronyms which only an insider could possibly comprehend. Four paragraphs on risk management described how UTAS had worked collaboratively, reviewed, planned and implemented recommendations. Exactly what was implemented to address what risks wasn’t disclosed.

Essentially UTAS’s chosen transition to sustainability requires more students and that requires more student accommodation. Property development is now the tail wagging the education dog.