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.

WHAT is it about the current downturn that will solved by Treasurer Josh Frydenberg’s 2020-2021 budget?

We know there’s a recession, or maybe it’s a depression? It doesn’t matter what it’s called. It’s the worst downturn in 90 years. But what are the symptoms that Treasurer Frydenberg is addressing?

Economists talk about supply induced downturns where the reduced supply of goods and services to markets negatively impacts activity. On the other hand, demand-induced downturns occur because not enough people are buying the available goods and services.

The government believes both supply and demand are to blame for the current downturn. The budget’s most costly measure addresses the supply problem. Businesses will be able to able to immediately write off the cost of business assets, even second-hand assets. Most businesses won’t be looking to buy new equipment when their existing gear is largely idle. And most will have to borrow to fund any assets of value. Which will assist banks no doubt but will only cause cash flow problems for the business having to pay back a loan years after the sugar hit of the immediate tax saving. Antiavoidance measures will be needed to prevent second-hand goods being shuffled around the economy with no overall increase in the nation’s capital stock.

The current government is always keen to focus on supply problems to justify handouts to business. But there’s excess supply capacity everywhere. Reduced demand is the major cause of the downturn. Which is why the directly targeted JobKeeper and JobSeeker have worked so effectively.

So why is the government now choosing to bring forward personal tax cuts as the second costliest budget measures in preference to more JobKeeper payments, which are extended only until March 2021, and JobSeeker payments which may revert to the totally inadequate $40 per day?

The government never explains where money that would normally have been spent has gone during the pandemic. Money only disappears from the system when taxes are paid and when bank loans are repaid. Apart from that money is available to be passed round the economy. There’s plenty of money out there, it’s just that it’s not moving. The rich are sitting on plenty of cash, so it was a relief to hear the government didn’t proceed with bringing forward tax cuts for high income earners.

Additional money which gets passed round the system is created every time a government spends or every time a loan is made. However the government’s additional direct spending in the circumstances is embarrassing modest.

It is also hoping more loans will get things moving. Consumer credits laws will be relaxed and the Reserve Bank is lending money to banks at 0.25 per cent interest for on-lending to clients.

The budget has noticeably avoided too much extra direct spending, hoping that tax cuts and asset write-offs will do the trick and markets will fix the rest. But there’s more to the economy than private businesses.

You’d be forgiven for forgetting we live in a federation, where state and local governments are the most important service deliverers in the nation. For them it’s essentially business as usual. Both failed to get a mention in Treasurer Frydenberg’s speech. More direct spending via the second and third tiers of government on all manner of services would not only have addressed the funding shortfalls faced by all states, the employment needs that were partially addressed with a JobMaker scheme, and the glaring inadequacies accentuated by the COVID pandemic particularly health services, aged care and social housing.

We will soon have levels of debt which won’t ever be repaid, and which will mostly be rolled over at maturity. This is not a problem. Debt servicing costs will be negligible. Because most debt will be rolled over, it won’t be borrowings per se but will represent equity in the nation, perpetual redeemable preference shares in Australia Inc. What better investment is there?

Now that the days of prime minister Abbott’s debt and deficit disaster mantra are a fading memory, the conservative side of politics have welcomed the large deficits because the penny has finally dropped that an increase in public debt is not a burden, but ipso facto means an increase in private assets.

Unfortunately the spending which causes the debt could easily have been better directed.

(Published in The Mercury 8th October 2020)

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