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.


  1. Congratulations John!

    One of your best commentaries ever!!

    Short, succinct and definitely to the point!

    I salute you!!

  2. Sort of fits with Steve Keens article on MMT. Not as short...