MUNGO MACCALLUM.  Morrison cranks out surplus fetish

Scott Morrison has a new obsession – the budget surplus.

In spite of his assurances to the contrary, this has not actually been delivered, and there are growing doubts that it will be – the storm clouds, the head winds of which the prime minister and his treasurer confusingly warn us, could well blow it away.

But it remains ScoMo’s fetish, replacing his pet rock, the lump of coal he brought lovingly into the parliament last year.  The quest for surplus is now his reason for being, his precious. And nothing is to stand in its way – certainly not economic reality.

The problem is, as any first year student of the dismal science could have told him, that a surplus is not an end in itself, but a tool, ro be used if and when the circumstances demand; and in the current circumstances a surplus would be not merely counterproductive, but downright perverse.

A surplus is a good idea when things are going well..  That’s why Peter Costello was able to rack up a few of them when the mineral boom was at its peak – the economy was, if anything, overheating and a surplus could provide a dampener, a corrective.

But today, however Treasurer Josh Frydenberg is desperately trying to keep the myth of a strong economy in the spotlight, what is need is not a dampener but a stimulus, and a large and urgent one. The fall in interest rates and the tax cuts may help, but as the Reserve Bank governor Philip Lowe has repeatedly declared, they will not be enough – a big kick along on immediate construction on infrastructure is the obvious solution.

Frydenberg is apparently considering something along those lines, but will not countenance abandoning, or even postponing, the much heralded surplus: it has become a test of the government’s credibility, and given that this is already tenuous, there is no real choice.

But there should be. As with food, clothing and politics, there are fashions in economics that come and go, and the idea that a surplus Is inherently desirable is one that has well and truly passed its use by date.

There was time when supply side economics was going to save the world from recession; it is now derided as trickle down theory, simply pandering to the rich and greedy. What was once called the J curve, a graph like a hockey stick, was going to be the lever that would haul us into prosperity. This too has been relegated to the locker room.

And I can remember when a high exchange rate was regarded as a national virility symbol. Now we prefer it to droop in order to enhance exports. And thus it has been with interest rates: a fall used to be good news, but last week it was more widely seen as a sign of stagnation, if not imminent recession.

The only thing that gives the putative surplus some dwindling credence is the fortuitous jump in iron ore prices, fuelled largely by the disaster which effectively closed down the mines in Brazil. But this bonanza will not last, and even if Morrison can preserve his surplus for one year, there is little prospect of it continuing over his hugely optimistic forecasts.

Which is probably just as well. What is left of our strong economy simply cannot afford it.

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11 Responses to MUNGO MACCALLUM.  Morrison cranks out surplus fetish

  1. John Doyle says:

    It seems a Budget surplus has most people completely bamboozled, certainly in Parliament. Not even one dissenting voice from Canberra. Yet even a rudimentary understanding of book keeping would show it up as a nonsense.

    What is a budget surplus? It’s a result whereby the government retires more public assets than it contributes. The extra tax over spending is the surplus [of tax]
    Since a budget resets to zero every year it has no carry over and requires the tax and spend figures to add to Zero. So to balance the budget the higher tax figure requires the non government sector to make up the difference.

    This is fine when the economy risks overheating, or when there is a large growth in the economy; like the housing boom in the Howard-Costello years. But otherwise the cost to the non government sector can be substantial, and has caused recessions in the past

    This all makes it extraordinary bad policy by e Federal Government trying to avoid a recession. So unbelievably clueless it very demeaning we will be put through this beacon of rampant ignorance for all the world to see. Who is out there to talk sense to Sco-Mo et al?

  2. Alasdair Wardle says:

    Prof Stephanie Kelton and other Modern Monetary Theorists, would argue the same. The LNP have got their own peculiar type of economics, that does make sense, and for some strange reason they are regarded as the better economic managers? Go figure.

  3. Jocelyn Pixley says:

    Thanks Mungo and, on the RBA’s interest rate cut, I am always amazed: the alleged gurus are now asking ‘why is monetary policy no longer working?’
    The obvious reason, as a minority know, is that raising the central bank rate is, as they said in the 1930s, like ‘pulling a string’ to mostly disastrous effects: the world Depression. If central banks lower rates as now over the world, however, the effect is like ‘pushing on a string’ – nothing much happens but at least defaults or worse are averted. That’s why the BIS admits CB rates are only a ‘backstop’ these days, and let’s be grateful.
    Labour market policy – raising wages – and government lasting, solid investment are what is needed.

  4. Philip Laird says:

    Thank you for your article. Before the election, many federal coalition politicians were saying now was not the time to remove negative gearing. It now appears that negative gearing, despite the cost to the budget and equity issues, will remain.
    Given the state of the economy and the need to bring forward some more infrastructure projects, to meet the need of a growing population and to provide some much needed stimulus, now is not the time to deliver a budget surplus at all costs.

  5. James O'Neill says:

    It is not rocket science to recognise that if government income is reduced by slashes to tax rates, then to achieve a surplus in the government’s budget, there has to be a reduction in expenditure. The government is admitting to no such reduction, notwithstanding that key areas like infrastructure badly need higher expenditure. The government is therefore being incredibly deceitful. It has unequivocal signals from the Reserve Bank governor to boost expenditure in key areas. Our current amateur Treasurer needs to stop pretending and take serious advice about what properly needs to be done.

  6. michael lacey says:

    There was time when supply side economics was going to save the world from recession; it is now derided as trickle down theory!
    It was always crap supply-side economics theory is pure nonsense!

    The whole neoliberal trend in macroeconomic policy. The essential thing underlying this, is to try to reduce the power of government and social forces that might exercise some power within the political economy—workers and others—and put the power primarily in the hands of those dominating in the markets. That’s often the financial system, the banks, but also other elites. The idea of neoliberal economists and policymakers being that you don’t want the government getting too involved in macroeconomic policy (deficit spending). You don’t want them promoting too much employment because that might lead to a raise in wages and, in turn, to a reduction in the profit share of the national income.

    The Great deficit scam!

    The individuals and organizations who most often spread deficit hysteria know very well that it has no basis in economic fact. Their motivation is to intentionally mislead you. Why would they do such a thing? Because they are lobbyists serving the interests of a particular economic class (the very rich).

    The Great Deficit Scam is not just any old scam. In fact, it’s probably the most powerful weapon the 1% has at its disposal to inflict harm on the 99%. Its destructive power is due to two factors: 1) it has a superficial aura of believability, and 2) many well-intentioned and sincere people have succumbed to it.

    • Wayne McMillan says:

      Michael, If look at the Public Finance fiscal history of countries like Australia and USA, you will notice that more than 80% of the time their Federal budgets were in deficit. In reality sovereign currency issuing countries that issue their own fiat currencies can always spend before they tax. Governments should be balancing the economy and not overly concerned with budget deficits/surpluses.

    • Richard Ure says:

      Just as encouraging workaholics to work harder while superficially deserving of financial incentives, makes no sense when we have unemployed and under-employed in our midst.

    • Martin Connolly says:

      Too true Michael
      More people have to learn that deficits actually put money into the economy, and surpluses take it out. There is no economic need for a country like ours to have a surplus, and certainly not a string of them. A recession has followed whenever that has happened on the past.

  7. Geoff Andrews says:

    Now that we’ve ruled off on the 2018/19 financial year, we should be soon receiving the actual figures for that year so we can compare them with the predictions made in last year’s budget. The results may be a good indication of how accurate this year’s entrail shuffling will be.
    But don’t they get fantastic mileage out of the fantasy of the word “surplus”?. It started even before this year’s budget; will continue through until August or September next year when the true figures will/may be released. If there’s no surplus, the new words will be “headwind”. “unforeseen” and “Labor”.

    • Richard Ure says:

      …”we have been telling you of the challenges ahead for some time.” and “conditions overseas outside our control” and possibly even “the impact of Brexit”.

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