The myth of the balanced budget
Something interesting is happening at the moment. Despite their rhetoric, their attempts to demonstrate economic prowess and their pretence at understanding economics, Australia’s federal government will have the honour of taking Australia’s gross debt position beyond half a trillion dollars ($500,000 million). It is an unprecedented amount and double that which they inherited from their predecessors in 2013. And incredibly, they have done this in less than four years.
Senator, Pauline Hanson was moved to remark, “At this rate we will never be able to pay it back,” she said. “We need to rein in our spending.” That is what we call an observation from ignorance. But let us not be too hard on her. There are 150 lower house members and 75 other senators who think the same way.
Some MP’s are calling for the reinstatement of the debt ceiling. Remember the former treasurer, Joe Hockey, who wanted to lift the debt ceiling to $500 billion back in 2013. In the end, the idea of a ceiling was abandoned following a deal done with the Greens.
A quick word of advice here for Senator Hanson. No, we won’t be paying it back – not ever. The fact is that a currency issuing nation can never run out of money, can never owe anything in its own currency, can always afford to buy whatever is for sale in its own currency, and indeed, has a responsibility to ensure that all men and women seeking work are able to find it.
If work cannot be found in private industry they should be employed by the state. As matters stand today, the government is failing in that responsibility because over 700,000 Australians are currently seeking work and cannot find it. That means we are not spending too much, we are spending too little.
The government’s reluctance to spend is consistent with their pursuit of what is, in their eyes, the Holy Grail: their long sought after balanced budget, one where total spending equals taxation receipts. It is a grossly flawed objective.
To avoid the embarrassment of having to fess up to that failure, to provide work for its citizens, our treasurer Scott Morrison has found a very convenient loophole for his, and the nation’s, future. He calls it “good debt.” His plan is to somehow separate value-adding “good” debt (infrastructure spending and the like), from the ever burdening “bad” debt (pensions, unemployment and sickness benefits etc), when preparing his next budget, in the hope that it will miraculously produce a balanced budget.
It’s actually a half good, half bad idea. The good half is that he recognises the value of infrastructure spending. The bad half is that he can’t see that welfare spending also puts money into the hands of people who spend it. Money spent on infrastructure is no different from money spent on welfare. It’s still spent! What he can’t see, is that rather than spend on unemployment welfare, he could harness the idle resources of the unemployed in ways superior to welfare spending, thus raising the living standards of all Australians and in turn, benefit the nation as a whole.
He could give them a job. He could, by his own definition, so easily convert his “bad” debt into “good” debt, by eliminating unemployment benefits in favour of employing the unemployed and the underemployed in public works. He could then confidently argue that because it is all good debt, there is no need to issue bonds in order to accommodate it. The money can be classified as “Overt Monetary Financing”, another way of saying, money created out of thin air. In doing so, he would have the so-called “balanced budget”, he so desperately wants.
A balanced budget is all just numbers in a computer. The trick is to have the numbers in the correct place. At the moment they are not, but they could be.