The Reserve Bank Governor is completely wrong about the federal government budget and it matters
Australian monetary policy effectiveness is on the decline. Steven Hail suggests policies that would get our economy back on track.
This might seem to be a shocking thing to say, but I am going to say it and I challenge anyone to tell me I am wrong.
What the Governor of the RBA (Philip Lowe) and the IMF have to say about Australian fiscal policy at the moment is not only completely incorrect, it is also precisely the opposite of the truth.
They are aware that monetary policy is now even less effective than it might once have been. Further interest rate cuts will do nothing useful for the economy. Quantitative easing didn’t work in Europe or Japan and it won’t work here. I think they know this. I agree. Some of us were saying this a while ago.
It is their beliefs about the Government budget that are entirely and potentially disastrously wrong. These misconceptions have been driving needless under- employment and inequality, privatis- ation and deregulation, household debt and private sector financial crises in many countries over a long period.
They talk about a need for what they call “fiscal discipline”. They imagine that fiscal discipline now means the Government will have sufficient fiscal space to support the economy if there is a down- turn. By fiscal discipline, they mean cuts in Government spending to provide the Government with a fiscal surplus. They think there is some reason, other than the risk of inflation, for the Australian Government to aim for a surplus. They may not use the “debt and deficit disaster” language of Joe Hockey or Scott Morrison. They may not talk about the Government maxing out on its credit card, like Tony Abbott. They may avoid slogans like “spending like a drunken sailor”. But when they talk about fiscal discipline, they mean the same thing.
They are completely wrong. They have still not bothered to even think about the implications of modern monetary theory and therefore have not learned the lessons it has to teach policymakers operating within a modern monetary system. If they had done so, they would realise that the responsible fiscal policy now would be to increase the fiscal deficit somewhat and not to aspire to a pointless and destructive Government surplus.
The existence and size of the current fiscal balance have no implications for the ability of a government with its own currency, a floating currency and no foreign currency debt to net spend in the future, in the maintenance of non- inflationary full employment.
The Australian Commonwealth Government has no purely financial constraint on its spending and it is ridiculous to suppose it can somehow “save” its own money. It can create money by spending and it can destroy money by taxing. But it cannot save the money it creates and destroys in these ways. That is a nonsensical concept. It cannot even borrow its own currency, in the conventional sense of “borrowing”. Government issuance of debt securities simply gives those of us who hold Australian dollars the option of swapping them for safe, interest-bearing transferable savings accounts at the Reserve Bank. That is all that government bonds are. And the Government doesn’t even need to issue them at all in order to cover its deficits. It chooses to issue them and they play a useful role in our financial system.
Their issuance does nothing to pay for government spending today and does nothing to limit the ability of the Government to spend in the future.
The limitation on government and private sector spending is always the supply of real productive resources within our economy. The Government can never run out of money, within our monetary system. This is the reality and it is a non-problem. To pretend other- wise is to be confused about how the system works, or to mislead people, or perhaps a bit of both.
In fact, so-called fiscal discipline today, if it means running a fiscal surplus, means that the Australian Government is destroying private sector money, thus reducing the net financial assets of the private sector. It means the Government is taking more money away from us in taxation than it is providing us with as a result of its spending. A government surplus is a non-government deficit. It weakens the balance sheets of the private sector. It helps to drive households into debt. It helps to create a more fragile financial system. Or if the private sector is not in a position to run up more debt and the rest of the world does not want to buy any more of our exports, then it just drives the economy into recession.
Far from providing room for the Government to support the economy in the event of a downturn, the fiscal discipline of a fiscal surplus simply makes such a downturn far more likely.
Dr Steven Hail is a Lecturer in Economics at the University of Adelaide, and is an ERA member.
You can follow Dr Steven Hail on Twitter@StevenHailAus, as well as on Facebook — at Green Modern Monetary Theory and Practice. His latest book is ‘Economics for Sustainable Prosperity’.
The original version of this article appeared on 1st March 2019 in the online publication Independent Australia.