Tuesday, 12 May 2020

Don't forget the States

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.


The starting point for a trip through the financial accounts of government entities across the Federation is the balance sheet for the Commonwealth Government (the GeneralGovernment or GG):

Chart 1

Commonwealth General Government

 Balance Sheet  at 30th June 2019 $ million

Assets

Non-financial Assets                                               

Buildings and structures                                           

26,578

Machinery and equipment                                           

14,965

Other fixed produced assets                                       

71,020

Other produced assets                                            

20,967

Land                                                              

10,089

Other non-produced assets                                         

4,340

Total non-financial assets                                          

147,959

Financial Assets                                                    

Currency and deposits                                             

8,521

Advances                                                           

75,394

Equity including contributed capital                               

124,450

Other financial assets                                            

245,515

Total financial assets                                               

453,880

Total Assets                                                          

601,839

less

Liabilities

Currency and deposits                                             

4,626

Other loans and placements                                        

8,035

Debt securities                                                    

636,357

Provisions for DB superannuation                     

415,227

Other liabilities                                                  

90,074

Total Liabilities                                                    

1,154,319

equals

GFS NET WORTH

-552,480

 

Source: ABS, Government Finance Statistics, Australia, 2018-19

Net worth is negative $552 billion. It’s a pretty skinny balance sheet, reflecting the role of the Commonwealth in the Federation. Borrowings of $636 billion are included in liabilities, As we shall see later the level of payments to States has produces the negative net worth figure. States (and local governments) have much more substantial balance sheets.

Included in assets is ‘equity including contributed capital’ of $124.45 billion. Of that $54.72 billion is the Commonwealth’s equity interest in its wholly owned subsidiaries. Government financial accounts group government businesses as either public non-financial corporations (PNFCs) or public financial corporations (PFCs). Currently the Commonwealth’s PNFC sector mainly comprises NBN and the PFC is almost entirely the Reserve Bank (RBA).

Below is what the balance sheet for the total Commonwealth public sector looks like:

Chart 2

Commonwealth Government

 Balance Sheet  at 30th June 2019 $ million

GG

PNFC

PFC

Elim

Consol Total

Assets

 

Non-financial Assets                                               

 

Buildings & structures                                          

26,578

2,352

428

0

29,358

Machinery & equipment                                            

14,965

44,403

170

0

59,538

Other fixed produced assets                                       

71,020

3,813

98

0

74,931

Other produced assets                                             

20,967

230

28

0

21,226

Land                                                               

10,089

1,279

224

0

11,591

Other non-produced assets                                         

4,340

0

0

0

4,340

Total non-financial assets                                          

147,959

52,077

948

0

200,984

 

Financial Assets                                                   

 

Currency & deposits                                             

8,521

2,078

1,719

0

12,318

Advances                                                           

75,394

0

0

13,340

62,054

Other loans and placements                                        

0

18

2,267

0

2,285

Equity including contrib capital                               

124,450

171

546

54,720

70,447

Other financial assets                                            

245,515

3,828

182,753

2,108

429,988

Total financial assets                                              

453,880

6,095

187,285

70,168

577,092

 

Total Assets                                                         

601,839

58,172

188,233

70,168

778,076

 

less

 

Liabilities

 

Currency & deposits                                             

4,626

14

148,901

0

153,540

Advances                                                          

0

13,340

0

13,340

0

Other loans & placements                                        

8,035

10,838

1,506

0

20,379

Debt securities                                                    

636,357

1,013

2,723

0

640,093

Provisions for DB superannuation                     

415,227

31

570

0

415,828

Equity including contrib capital

24,837

29,883

54,720

0

Other liabilities                                                  

90,074

8,099

4,651

2,108

100,716

Total Liabilities                                                    

1,154,319

58,172

188,233

70,168

1,330,556

 

equals

 

GFS NET WORTH

-552,480

0

0

0

-552,480

 

Source: ABS, Government Finance Statistics, Australia, 2018-19

The net worth doesn’t change, but the consolidated accounts show all the assets and liabilities for the Commonwealth and its businesses.

The first 3 columns list the balance sheets for the general government (GG), the PNFCs and the PFCs. The last column is the consolidated figures for the three, showing the Commonwealth government as a whole. The blue shaded column is interposed to show what amounts are eliminated upon consolidation. GG’s equity of $54.72 billion in NBN and RBA (GG’s asset) is offset against NBN and RBA equity (shown as liabilities in the PNFC and PFC accounts). The other major elimination on consolidation is GGs loan to NBN of $13.34 billion (GG’s asset) which is offset against NBN’s loan advance from GG of $13.34 billion (PNFC’s liability).

By way of explanation of the various accounts in the balance sheet:

1.    Financial assets are deposits etc, shares, loans, receivables, and other financial claims. All other assets are non-financial assets. These are mainly tangible assets like land, buildings, equipment etc. but also includes computer software.

2.    Buildings and structure – self-explanatory.

3.    Machinery and equipment – self-explanatory. Included is NBN’s assets of $30 billion.

4.    ‘Other fixed produced assets’ includes military equipment (at written down value) of $67 billion. The balance is principally computer software.

5.    ‘Other produced assets’ include heritage and cultural assets of $12 billion and inventories of $9 billion.

6.    Land – self-explanatory.

7.    Currency and deposits (financial assets) - self-explanatory.

8.    Advances (financial assets) include student loans (HECS) of $52 billion, loans to states and territories of $4 billion, loan to NBN of $13 billion. The latter is eliminated on consolidation.

9.    Other equity (financial assets) of $70 billion are shares held by the Future Fund. Equity in government businesses on GG’s balance sheet of $55 billion is eliminated on consolidation.

10.  Other financial assets include Future Fund investments(other than shares) of $126 billion, receivables of $56 billion, IMF quota of $13 billion, the GG’s bank a/c with RBA of $34 billion and RBA’s assets of $180 billion represented by bonds, foreign exchange investments and gold.

11.  Currency and deposits (liabilities) are principally from RBA’s balance sheet. These mainly comprise bank notes and coins on issue of $80 billion, GG’s bank a/c of $34 billion with RBA and bank reserves of $29 billion (which are the major banks’ exchange settlement a/cs with RBA).[GG’s bank a/c with RBA included as GG’s asset in 10.above and again as RBA’s liability here at 11 should have been eliminated upon consolidation. It is not clear why it wasn’t.].

12.  Advances are $13 billion loan to NBN which is eliminated on consolidation.

13.  Debt securities of $640 billion are total Commonwealth government borrowings.

14.  Provision for defined benefit superannuation is the estimated unfunded amount for the now closed defined benefit fund.

15.  Other financial liabilities include creditors, other payables, employee leave and other provisions.

 

The matter of notes and coins on issue ($80 billion), bank reserves of $29 billion and the GG’s $34 billion a/c with RBA, all included as liabilities in currency and deposits, needs further explanation.

As noted in point 11 above the GG’s a/c of $34 billion with RBA is not a liability of the total government. It is an internal ‘loan’ that should have been eliminated upon consolidation.

Notes and coins on issue, whilst technically a liability of the Commonwealth, is not an amount that will ever be paid.  They are government IOU’s but ones which will never be repaid. Convertibility into gold is no longer possible. It would be more accurate to treat issued notes and coins as our equity in the nation, not as a liability that will burden our grandchildren. Very few government governments have retained earnings, and none have contributed capital. Notes and coins on issue of $80 billion, at the very least form part of this nation’s de facto equity. It is certainly not a liability that will ever be paid.

So where do notes and coins come from? And why do they appear as liabilities on RBA’s balance sheet?

Reserves are swapped for notes and coins. Banks hand over reserves and the RBA gives them notes and coins in exchange.

So where do reserves come from? Only the government can create reserves. The GG does so by spending and the RBA does so by paying for private assets (bonds etc) simply by crediting banks’ reserve a/cs.

One can only fully understand spending, bank reserves and government debt if the transactions of the Commonwealth entities are unbundled and presented for each entity and for the total Commonwealth.

Let’s suppose the government spends $1,000.

Chart 3: Government spends  $1,000

GG

RBA

Elim

Consol Total

+

+

-

=

Assets

 

Bank a/c RBA

-1,000

-1,000

0

 

Total change in assets                                                         

-1,000

0

-1,000

0

 

less

 

Liabilities

 

Bank reserves (Exchange Settlement a/cs)

1,000

 

1,000

Deposit GG

-1,000

-1,000

0

 

Total change in liabilities                                                

0

0

-1,000

1,000

 

equals

 

CHANGE NET WORTH

-1,000

0

0

-1,000

 

Government spending of $1,000 will obviously reduce the government’s bank a/c by that amount and the Commonwealth net worth will decline by $1,000.

At the RBA, the spending will be recorded as a transfer of $1,000 from the GG’s a/c to a bank’s reserve a/c. The bank will then credit the account which the payee has with that bank. Additional reserves have been created, simply by spending. All spending is the same. It is irrelevant where the money comes from, how it found its way into the GG’s RBA a/c, whether from taxes, borrowings or by the RBA simply crediting the RBA’s a/c.


What happens if GG raises $1,000 in taxes.

Chart 4: Government raises $1,000 tax       

GG

RBA

Elim

Consol Total

+

+

-

=

Assets

 

Bank a/c RBA

1,000

1,000

0

 

Total change in assets                                                          

1,000

0

1,000

0

 

less

 

Liabilities

 

Bank reserves (Exchange Settlement a/cs)

-1,000

 

-1,000

Deposits GG

1,000

1,000

0

 

Total change in liabilities                                                

0

0

1,000

-1,000

 

equals

 

CHANGE NET WORTH

1,000

0

0

1,000

 

It is simply a reversal of the spending example. The GG’s bank a/c increases, bank reserves are reduced. The Commonwealth’s net worth increases.

Only the government can create reserves and only the government can destroy them.

 For the rest of the time reserves are shuffled round the banking system, as exchange settlement a/cs, facilitating the settling by banks of transactions between their respective customers. Therefore, as with notes and coins, whilst reserves are liabilities from an esoteric accounting viewpoint, they are not amounts that ever need to be paid. They are government IOUs, issued by government to be used by the holder to settle transactions within the banking system. MMT economists call these IOU’s ‘outside money’ as distinct from ‘inside money’ created by banks whenever they make loans.

Banks aren’t keen to hold reserves in excess of their need to settle transactions on clients’ behalf. Recently the RBA has only been paying 25 basis points below the RBA official interest rate but when that fell to 25 basis points the interest on excess reserves became zero. The suite of announcements by RBA governor Lowe in March included raising the interest on excess reserves to 10 basis points

This is what happens when GG issue a $1,000 bond.


Chart 5: Government issues $1,000 bond       

GG

RBA

Elim

Consol Total

+

+

-

=

Assets

 

Bank a/c RBA

1,000

1,000

0

 

Total change in assets                                                          

1,000

0

1,000

0

 

less

 

Liabilities

 

Bank reserves (Exchange Settlement a/cs)

-1,000

 

-1,000

Deposits GG

1,000

1,000

0

Borrowings GG (bonds)

1,000

 

1,000

 

Total change in liabilities                                                

1,000

0

1,000

0

 

equals

 

CHANGE NET WORTH

0

0

0

0

 

 

The GG’s net worth doesn’t change. Its increased bank a/c is offset by its increased borrowings. At the RBA, money is transferred from reserves into GG’s a/c. It’s an IOU swap. 

Bank reserves, although a perfectly secure government IOU, are not the best asset for a bank to hold from a profit maximising viewpoint. Banks prefer to swap reserves IOUs for bond IOUs which are more flexible assets, ones that can be sold, pledged or otherwise dealt with to bring greater returns to a bank’s bottom line. It is little wonder that MMTers view bond issuance as a form of corporate welfare.

Why issue $10 billion of  government bond IOUs burdening grandkids, as the narrative goes, when it’s possible to spend government $10 billion of government money to create $10 billion in IOUs via extra reserves with an 0.1 % interest rate with no need to ever repurchase those reserves ? Aren’t people entitled to an explanation? There may be reasons from time to time, for monetary reasons maybe, to issue bonds , but as an unreserved policy for all occasions when taxes fail to provide enough funds in GGs RBA a/c, borrowing via bond issuance is an ideological preference.

The last month or so has seen the RBA prepare its balance sheet for GG’s $130 billion spending and to allow banks to use purchased bonds as collateral for the $90 billion Term Loan Scheme, for funds from the RBA to banks for on lending to SMEs. In this period the RBA’s balance sheet has increased by 50 per cent, with the RBA accepting bonds and other assets from banks as a swap for increase bank reserves. The following graph shows the remarkable change:

 


Source: RBA

The following is what happens from an accounting perspective when the RBA buys a government bond on the secondary market.

 

Chart 7: QE - RBA buys bond on secondary market

GG

RBA

Elim

Consol Total

+

+

-

=

Assets

 

Investments RBA

1,000

1,000

0

 

Total change in assets                                                         

0

1,000

1,000

0

 

less

 

Liabilities

 

Bank reserves (Exchange Settlement a/cs)

1,000

0

1,000

Borrowings GG (bonds)

1,000

-1,000

 

Total change in liabilities                                                

0

1,000

1,000

0

 

equals

 

CHANGE NET WORTH

0

0

0

0

 

The government’s overall net worth doesn’t change. Nothing happens in GG. In the RBA’s a/cs it buys an asset simply by crediting bank reserves. Overall net borrowings decrease as the bond is now owned by GG’s subsidiary, the RBA.  Bank reserves are increased. Put another way, one GG IOU has been swapped for another. The bond purchase shown in Chart 5 has simply been reversed.

It confirms that it is painless to swap a borrowing IOU that supposedly casts a pall over the nation’s future with another IOU, in the form of bank reserves, which as we have seen above is not a liability per se, but more accurately as de facto equity in our national government.


If the bond now owned by RBA is held to maturity and is finally redeemed this is what will happen:

 

Chart 8: Bond ex QE matures

GG

RBA

Elim

Consol Total

+

+

-

=

Assets

 

Bank a/c RBA

-1,000

-1,000

0

Investments RBA

-1,000

 

-1,000

 

Total change in assets                                                         

-1,000

-1,000

-1,000

-1,000

 

less

 

Liabilities

 

Deposit GG

-1,000

-1,000

0

Borrowings GG (bonds)

-1,000

 

-1,000

 

Total change in liabilities                                                

-1,000

-1,000

-1,000

-1,000

 

equals

 

CHANGE NET WORTH

0

0

0

0

 

The government’s net worth doesn’t change. GG’s borrowings fall at the same time as RBA’s assets fall. We are continually told that unwinding QE will cause immense problems in the years ahead. The accounting mechanics are painless as one would expect for transactions between members of a group.

It does however beg the question, why issue the bond in the first place? Why doesn’t the RBA directly fund government spending? The following looks at that possibility:

Chart 9: RBA directly funds GG

GG

RBA

Elim

Consol Total

+

+

-

=

Assets

 

Bank a/c RBA

1,000

1,000

0

Loan to GG

1,000

1,000

0

 

Total change in assets                                                         

1,000

1,000

2,000

0

 

less

 

Liabilities

 

Deposit GG

1,000

1,000

0

Loan from RBA

1,000

1,000

0

 

Total change in liabilities                                                

1,000

1,000

2,000

0

 

equals

 

CHANGE NET WORTH

0

0

0

0

 

In the above chart the RBA makes a loan to GG. It credits the GG’s bank a’/c at the RBA in the same way as a private bank makes a customer loan. There is no change to net worth of the total government. It simply positions the GG to be able to spend and create more bank reserves in the process. Whether GG then swap the bank reserves IOU for a bond IOUs is a separate and arguably an unrelated matter. Spending must occur to create reserves, before any bond issue takes place. Why do it?


Central bank purchases of government bonds on the secondary market is still regarded as unconventional monetary policy in Australia. Around the world it is much more widespread. In Japan almost one half of government bonds are held by the Bank of Japan BoJ. Almost all new bonds end up on BoJ’s balance sheet.

Yet central bankers are always keen to assert their independence from government and they are not beholden to any government. RBA Governor Lowe afraid his fig leaf of independence might be slipping sought to assure us on April 21st this year: 

“I would like to restate that we are buying bonds in the secondary market and we are not buying bonds directly from the government. One of the underlying principles of Australia’s institutional arrangements is the separation of monetary and fiscal policy – that is, the central bank does not finance the government, instead the government finances itself in the market. This principle has served the country well and I am confident that the Australian federal, state and territory governments will continue to be able to finance themselves in the market, as they should.

While we are not directly financing the government, our bond purchases are affecting the market price that the government pays to raise debt. Our policies are also affecting the price that the private sector pays to raise debt. In this way, our actions are affecting funding costs right across the economy as they should in the exceptional circumstances that we face. But our actions should not be confused with the Reserve Bank financing the government.”

There you have it. Just because it looks like a duck, quacks like a duck and walks like a duck people shouldn’t jump to the conclusion it’s a duck. There appears to be a expectation, or maybe just a hope, that when we leave hibernation and cross the bridge to the other side, life as we know it will resume and the government will finance itself in the market just as it always does, and private banks can resume what they know best, creating money for speculative purchases of existing assets via a government mandated Ponzi scheme whilst the real economy’s continues to lag due to the demands of the Ponzi.

There’s got to be a better system. Hopefully before we get to the other side there will be a greater understanding of our current position. Understanding the government’s balance sheet is crucial, not just the balance sheet of the GG but the consolidated balance sheet of the Commonwealth. Budget paper contains financial statements for PNFC sector and PFC sector but fail to produce a consolidated set of accounts. That does not appear until April courtesy of ABS, 10 months after year’s end. The PFC sector includes the RBA. It would be normally be grossly remiss of analysts and commentators to pass judgement on a company group say, if they have never bothered to understand the group’s balance sheet. But in the case of government finances they do it all the time, almost without exception. It is only with an understanding of the entities that make up the consolidated group is it possible to begin to understand how the system works., how government finances are managed.

Understanding the clear difference between outside (government) money and inside (bank created) money is fundamental. The fuzzy grasp of money and debt stretches right across the political spectrum. The Bank of England in 2014 put the final nail in the coffin of the discredited loanable funds theory to explain money creation in a modern economy. Most of the money in the economy is created, not by printing presses at the RBA but by private banks when they provide loans. Yet it is ever only the government which gets accused of printing money, usually in a derogatory way to infer irresponsible profligacy. Banks are never described as money printers when they make loans. Yet if the RBA does it is called money printing.

Creating additional reserves by simply spending, creates an extra liability for the Commonwealth, but does not create an obligation that has to be paid. It is only when a bond IOU is issued as a swap for reserves that an obligation to repay arises. But as we have seen with QE, when the ownership of the bond passes to RBA, a wholly owned subsidiary of GG, the Commonwealth’s net borrowings are reduced. We need therefore to adopt a more nuanced view of GG’s borrowings, not simply as a figure to frighten the horses and burden our grandchildren.


Given the large negative net worth figure on GG’s balance sheet it is worth having a quick look at where all the money goes?

The best place to start looking is GG’s cash flow statement. This is the GG cash flow statement for 2018-19:

 

Chart 10

Commonwealth General Government

Cash Flow Statement 2018-19 $ million

Net cash flows from operating activities                            

Cash receipts from operating activities                             

Taxes received                                                     

446,945

Grants and subsidies received                                      

6,373

Receipts from sales of goods and services                          

8,134

Interest received from public non-financial corps          

352

Interest received from public financial corps              

580

Interest received from other                                       

2,871

Other receipts                                                      

17,537

Total cash receipts from operating activities                      

482,792

Cash payments from operating activities                            

Payments for employees, goods & services                  

-147,656

Grants and subsidies paid to state governments                     

-126,495

Grants and subsidies paid to the private sector                    

-11,546

Grants and subsidies paid to universities                          

-10,220

Grants and subsidies paid to local governments                     

-436

Grants and subsidies paid to public corporations                   

-199

Interest paid                                                      

-18,951

Other payments (mainly personal benefit payments)                                                    

-147,933

Total cash payments for operating activities                       

-463,436

-463,436

Total net cash flows from operating activities                       

19,356

Net cash flows from transactions in non-fin assets            

Sales of non-financial assets                                      

597

Purchases of new non-financial assets                              

-14,656

Total net cash flows from transactions in non-fin assets        

-14,059

Net cash flows from investments in financial assets

Total net cash flows from investments in financial assets

-11,492

-11,492

Net cash flows from financing activities

Borrowing (net)

10,841

Other  (net)

-2,906

Total net cash flows from financing activities

7,935

NET CHANGE IN  CASH                                      

1,741

 

Source: ABS, Government Finance Statistics, Australia, 2018-19

Like all cash flow statements, outlays and receipts are grouped under three headings, operating, investing and financing. Financing includes borrowings in and out, investing includes purchases and sales of fixed assets, shares etc, whilst operating includes all government revenue and operating expenses (i.e. those not included as investing or financing expenses).

Net cash from operating activities was $19 billion, investment in non-financial assets (capex) accounted for $14 billion, financial assets (Future Fund investments etc) were $11 billion leaving $8 billion needed from borrowings. Cash on hand ended up rising by a modest r $1.7 billion.

It is  clear where GG’s money came from and where it went. As can be seen $126 billion was paid to State and Territory governments (some of this subsequently flowed to local governments). This is the way our Federation works.

So, what does the balance sheet for the Federation, for the total public sector comprising all three levels of government, look like?

Here it is:

Chart 11

All Levels of Government, - Total Public Sector

Balance Sheet at 30th June 2019

C'wealth

Control n.f.d.

State

Local

Consol

Assets

Non-financial Assets                                               

Buildings and structures                                           

29,358

35,924

780,480

329,289

1,175,051

Machinery and equipment                                           

59,538

4,424

42,022

11,661

117,645

Other fixed produced assets                                       

74,931

855

10,159

730

86,675

Other produced assets                                            

21,226

1,433

22,582

2,431

47,672

Land                                                               

11,591

8,727

337,968

124,653

482,939

Other non-produced assets                                          

4,340

247

2,775

187

7,549

Total non-financial assets                                          

200,984

51,610

1,195,987

468,950

1,917,532

Financial Assets                                                    

Currency and deposits                                             

12,318

4,743

33,728

12,494

63,246

Advances                                                           

62,054

0

10,470

120

69,531

Other loans and placements                                         

2,285

13

40,912

4,582

37,624

Equity including contributed capital                              

70,447

2,470

41,820

519

115,257

Other financial assets                                            

429,988

22,817

218,844

17,987

679,090

Total financial assets                                              

577,092

30,043

345,774

35,703

964,748

Total Assets                                                          

778,076

81,653

1,541,761

504,653

2,882,279

less

Liabilities

Currency and deposits                                             

153,540

8

8,358

672

162,441

Advances                                                          

0

0

10,070

212

7,169

Other loans and placements                                        

20,379

5,210

25,515

13,213

54,149

Debt securities                                                    

640,093

0

319,337

0

959,227

Provisions for DB superannuation                     

415,828

8,385

174,343

9

598,565

Other liabilities                                                 

100,704

9,789

190,477

9,834

300,329

Total Liabilities                                                    

1,330,544

23,392

728,101

23,942

2,081,880

equals

GFS NET WORTH

-552,468

58,260

813,659

480,712

800,399

 

 

Source: ABS, Government Finance Statistics, Australia, 2018-19

 

Public assets total $2,882 billion with $2,082 billion of liabilities, for a net figure of $800 billion

By way of explanation:

1.    The column ’Commonwealth’ are the figures we saw in chart 1. Net worth is negative $552 billion.

2.    The figures in column ‘Control n.f.d’ are figures for entities where control is not clearly defined, split between the Commonwealth and the States, for example universities. Net worth is $58 billion.

3.    The figures in ‘States’ column are the consolidated ones for states and territories. The combined net worth is $814 billion.

4.    The figures in ‘Local’ column are the consolidated ones for local government across the nation. The combined net worth is $481 billion.

5.    The ‘Consol’ figures are the consolidated figures for the nation’s total public sector. The total is $800 billion. .

As we have already noted above:

1.    The GG’s $34 billion bank a/c at the RBA (included as an ‘other financial asset’ should have been offset against the RBA’s liability to GG, included in ‘currency and deposits’.

2.    Notes and coins on issue of $80 billion included in the Commonwealth’s liability under ‘currency and deposits’ are more accurately described as perpetual notes (securities). They are never repaid.

3.    Bank reserves of $29 billion are included as a Commonwealth liability under ‘currency and deposits’. There are no repayable dates. They have equity rather than debt characteristics and accordingly are included with perpetual notes. As an aside, following RBA activity in the secondary bond market in March/ April 2020 reserves are currently $94 billion.

4.    Commonwealth bond issues of $636 billion included with borrowings are perhaps better descried as redeemable preference shares. It is highly likely that redemption will be funded by another bond issue and are more like an equity such as a redeemable preference share than a fixed term liability. It is also an odds on certainty that as the Australian economy is revived post Covid-19, more bonds will end up on the RBA’s balance sheet via QE which as we have seen have zero effect on the net worth of the total public sector.

If we proceed with the above four adjustments, the total public sector balance sheet at June 2019 will look like this:

 

Chart 12

All Levels of Government, - Total Public Sector

Balance Sheet at 30th June 2019

Adjusted and Consolidated

Assets

Non-financial Assets                                                

Buildings and structures                                           

1,175,051

Machinery and equipment                                           

117,645

Other fixed produced assets                                       

86,675

Other produced assets                                            

47,672

Land                                                              

482,939

Other non-produced assets                                         

7,549

Total non-financial assets                                           

1,917,531

Financial Assets                                                   

Currency and deposits                                             

63,246

Advances                                                           

69,531

Other loans and placements                                        

37,624

Equity including contributed capital                              

115,257

Other financial assets                                            

645,090

Total financial assets                                              

930,748

930,748

Total Assets                                                         

2,848,279

less

Liabilities

Currency and deposits                                              

19,441

Advances                                                          

7,169

Other loans and placements                                        

54,149

Debt securities                                                   

323,227

Provisions for DB superannuation                     

598,565

Other liabilities                                                 

300,329

Total Liabilities                                                    

1,302,880

equals NET EQUITY  comprising

Perpetual notes on issue

109,000

Redeemable preference shares

636,001

Accumulated funds and reserves

557,879

NET EQUITY

1,302,880

 

 

The nation’s equity in the total public sector is $1,303 billion.


Debt securities of $323 billion principally comprise State borrowings, most of which are fixed term loan arrangements.

It now looks a little less scary, not that lower or even negative equity for a sovereign currency issuing government is necessarily a cause for concern.

The Federation is at the crossroads following Covid-19. The existing needs of the States and to a lesser extent local governments and universities requires grants and subsidies from the Commonwealth, known as horizontal fiscal equalisation. This can be seen from the cash flow statement for the total public sector for 2018-19.

 

Table 13

 All Levels of Government, - Total Public Sector

Cash Flow Statement for 2018-19 $ million

Cwealth

Control n.f.d.

State

Local

Total

Net cash flows from operating activities

Cash receipts from operating activities

  Taxes received                                                     

446,676

0

83,544

19,060

548,758

  Grants and subsidies received                                      

6,373

10,659

130,148

6,582

312

  Receipts from goods and services                          

23,459

19,860

93,551

14,817

145,085

  Interest received                                                  

5,271

264

4,549

855

10,263

  Other receipts                                                      

16,233

2,133

39,583

6,871

63,661

  Total cash receipts from operating activities                      

498,013

32,916

351,376

48,186

768,080

 Cash payments from operating activities                             

  Payments for employee, goods and services                 

-162,744

-29,173

-243,455

-31,344

-459,667

  Grants and subsidies paid                                          

-148,697

-11

-13,524

-44

-11,784

  Interest paid                                                       

-19,472

-189

-13,777

-663

-33,425

  Other payments                                                     

-147,933

-797

-50,062

-1,387

-198,505

  Total cash payments for operating activities                        

-478,846

-30,170

-320,817

-33,439

-703,381

 Total net cash flows from operating activities                      

19,167

2,747

30,559

14,747

64,698

Net cash flows from invest in non-fin assets

Sales of non-financial assets

799

251

3,430

824

5,302

Purchases of new non-financial assets

-22,657

-4,394

-52,362

-14,430

-93,841

Purchases of second-hand non-financial assets

0

0

-18

0

-18

Total net cash flows from invest in non-fin assets

-21,858

-4,142

-48,951

-13,607

-88,557

Net cash flows before financing activities

-2,691

-1,395

-18,392

1,140

-23,859

 

Source: ABS, Government Finance Statistics, Australia, 2018-19

The above table is a truncated cash flow statement excluding financing activities and purchase and sale of financial assets (shares etc).

The total column is the sum of the three levels of government plus the ‘control n.f.d’ sector comprising universities. Most grants received and paid are between the various levels of government and are eliminated when calculating the ‘total’ figures. Only $11.784 billion of grant payments (in the total column) flow outside the public sector, to NGOs and private entities.

Despite inflows from the Commonwealth, States’ net cash flows after operating expenses and capex (non-financial assets) were a negative $18 billion in 2018-19. With increased demands for State spending at a time of reduced State government revenue, and a Commonwealth government which needs arm twisting before deficit spending, States are going to feel the fiscal pressure as much as anyone. Being closer to the coalface when it comes to service delivery, States will be right in the firing line. Being more affected by funding constraints, from the Commonwealth and from their own sources, States are predisposed to austerity. Gaps between supply and demand for States’ services will inevitably widen.


The National Cabinet should keep take advantage of their momentum and start making meaningful reforms to our Federal system. 

An investment in greater understanding will reap huge rewards in the future.

Without it States face a perilous future.


11 comments:

  1. Thank you for this piece.
    I wonder, is there any hope ahead that the Fed Treasury/Reserve Bank can adopt MMT theory and educate our Treasurers?
    Appreciate all your blogs.

    stringbean@speedpost.net

    ReplyDelete
    Replies
    1. We live in hope Jack. I don't reckon it's too far away altho' they'll call it something else. The RBA's weekly balance sheets look awfully like MMT to me.

      Delete
  2. It's a long complicated read John. Does it come with a Conclusion/Summary?

    ReplyDelete
    Replies
    1. Gordon, I tried to present a conclusion in the final text box. Essentially if we borrow from our own bank we owe money to ourselves.

      Delete
  3. Good article, again in the Merc. Thanks.

    ReplyDelete
  4. Have you been in the business of advising either State Political Party?

    ReplyDelete
  5. This comment has been removed by a blog administrator.

    ReplyDelete
  6. This comment has been removed by a blog administrator.

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