In part 1 of this two-part series I gave a brief overview of the contemporary mainstream attitude to central government budgets, and argued that the constant fear of inflation in the post-1970s era has a lot to do with the dominant theory. But this mainstream view is strongly contested within the economics profession.

Economists tend not to trust vote-hungry politicians with the public purse, and so “white lies” seem to have been invented (acknowledged by late US economist Paul Samuelson) to impose an artificial constraint on government spending.

The crisis of the 1970s also led to governments taking a more favourable view of capital in its eternal tug-of-war with employees, such that capital now gets a larger share of national income relative to wages.

The natural environment has also been sacrificed as governments press more desperately for higher levels of production and consumption, even while the environment is patently downgraded.

We can summarise the trends resulting from the push for balanced budgets at the national level as follows:

1. Reduced government spending on health, education, research, the public service, employment schemes, and so on, with a preference for user-pays.
2. Outsourcing of former public-service work.
3. The entry of foreign financial capital and businesses (deregulation), with a red-carpet approach to foreign firms.
4. The granting of “golden visas” to high-wealth immigrants.
5. The selling of public assets, sometimes to foreign buyers.
6. Lower taxes for business and the wealthy, to stimulate them in the belief that government-run entities must make way for more efficient private firms.
7. Aggressive growing of the economy, led by the private sector, to keep the government debt-to-GDP ratio lower than otherwise.
8. A reluctance to initiate publicly-funded major reform such as building new electricity infrastructure or an electric-vehicle industry to suit a low-carbon economy (even the NDIS relies heavily on private providers).
9. Higher immigration in the belief that most migrants will pay more tax rather than make claims on the welfare system (at least initially).
10. Less Commonwealth money going to the states and territories.
11. Less government money in the system, requiring the non-government sector to run down savings, take on more debt, or reduce its spending – until the government is forced to spend more, including on welfare.
12. Less money going to foreign aid.
13. A fear of questions such as “where will the money come from?” for new policies, or the claim there is a “black hole” in a party’s costings.
14. A fear of bold initiatives such as a true full employment scheme or the rebuilding of national industries.
15. A preference for self-funded retirement, and increasing ages for age pensions, due to the perceived budget burden.
16. The use of questionable phrases such as “cost to the budget” or “cost to the taxpayer” when the government creates money to pay for things.

Taken as a whole, this list can explain a lot of problems in Australian society, and similar nations around the world. US President Donald Trump seems to be taking government downsizing to an extreme, while the UK has had government fiscal rules for some time.

Of course, regardless of whether we accept the mainstream view that balanced budgets might be desirable at the national level, there is still considerable scope in Australia for more targeted taxation up to average OECD levels, or beyond, and the reduction of tax subsidies to polluting industries, superannuation, and so on. This is the approach of most progressive organisations who may fear “coming out” in favour of the minority view.

Given the evidence for the minority view, we are left wondering why the economics profession doesn’t (i) convincingly refute the challenge; or (ii) accept the new paradigm.

The short answer is that economics is less of a science and more of a belief system about how humans should interact with the natural world and each other; while pontificating about which classes of individuals are deserving of rewards or punishments. Such a belief system is less amenable to evidence than the natural sciences. Those with a history of a scriptural belief don’t want to become apostates – and risk their career in a profession where “groupthink” is valued and dissent is frowned upon.

Back in the real world, federal government budgets are best seen as complex statements about government priorities and values given its taxing and spending decisions. Yet we constantly hear nonsensical proclamations about red ink and black ink as if the Australian Government is a business that must make a profit or become insolvent – as business bro Elon Musk recently proclaimed about the US.

The words “deficit” and “surplus” are arguably misleading descriptors at the national level: a deficit is a net injection of money into the system while a surplus is a drain. (In practice, it is also necessary to take into account a nation’s trade deficit or surplus, since the non-government sector is composed of the domestic private sector and the foreign sector.)

Even more controversially, we must also come to grips with the maximum sustainable scale of a nation’s economy, and the global economy, but that is a discussion for another time.

Read Part 1 of this two-part article:

https://publish.pearlsandirritations.com/budgets-black-holes-black-ink-or-black-magic-part-1-of-2/