tag:theconversation.com,2011:/fr/topics/budget-deficit-8080/articlesBudget deficit – The Conversation2024-02-27T20:00:16Ztag:theconversation.com,2011:article/2245862024-02-27T20:00:16Z2024-02-27T20:00:16ZUS temporarily avoids government shutdown but threat remains: 4 essential reads<figure><img src="https://images.theconversation.com/files/578384/original/file-20240227-24-l6d3lt.jpg?ixlib=rb-1.1.0&rect=129%2C931%2C8497%2C4811&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">President Biden and Vice President Harris met on Feb. 27, 2024, with congressional leaders to find a way to avoid a shutdown.</span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/Biden/ff2a1de2d69744cf80a497414c3edd8f/photo?Query=biden&mediaType=photo&sortBy=creationdatetime:desc&dateRange=Anytime&totalCount=124199&currentItemNo=7">AP Photo/Evan Vucci</a></span></figcaption></figure><p>Congress <a href="https://www.bloomberg.com/news/articles/2024-02-29/house-passes-short-term-spending-to-avert-us-government-shutdown?srnd=homepage-americas&sref=Hjm5biAW">temporarily averted</a> a <a href="https://www.bloomberg.com/news/articles/2024-02-26/government-shutdown-q-a-will-it-shut-down-and-what-you-should-know">partial government shutdown</a> that would have taken effect on March 2, 2024, by passing a very short-term funding extension.</p>
<p>The measure – which gives Congress more time to finalize spending packages for the current fiscal year – keeps funds flowing to government agencies until March 8 for some departments and until March 22 for the others. A short-term spending deal <a href="https://www.cnn.com/politics/live-news/federal-government-shutdown-funding-11-14-23/index.html">reached just a little over three months ago</a>, which helped prevent the last threatened shutdown, had given Congress two deadlines: March 1 and March 8, 2024, with different departments closing down if funding wasn’t passed by each date. </p>
<p>Democrats and Republicans have been far apart on funding the government, as a group of hard-right lawmakers <a href="https://www.nytimes.com/2024/02/27/world/europe/republicans-spending-shutdown.html">demands spending cuts and conservative policies</a> such as new restrictions on abortion access, as part of any agreement. </p>
<p>If following U.S. politics feels a little like “<a href="https://www.imdb.com/title/tt0107048/">Groundhog Day</a>,” you’re not alone. The Conversation has been covering the increasingly frequent shutdown close calls in recent years by asking experts in politics, economics and other fields to provide context and explain the consequences of a government shutdown. The following is a roundup of some of those articles from our archive. </p>
<h2>1. A shutdown is the wrong way to negotiate a budget</h2>
<p>The small band of conservatives who keep staging these showdown standoffs often use fiscal discipline as a rallying cry. The government is spending too much money, they say, and it’s up to them to put a stop to it. </p>
<p>On the goal of reducing the high U.S. budget deficit – currently about $1.6 trillion – <a href="https://theconversation.com/gop-shutdown-threat-is-the-wrong-way-to-win-a-budget-war-history-shows-a-better-strategy-for-reducing-the-deficit-213938">you won’t get an argument</a> from <a href="https://www.linkedin.com/in/raymond-scheppach-19b98536">Raymond Scheppach</a>, former deputy director of the Congressional Budget Office and retired professor of public policy at the University of Virginia. </p>
<p>But trying to cut the deficit by holding the government hostage is the wrong way to do it, he wrote. </p>
<p>“First of all, shutdowns don’t get results,” Scheppach explained. “The U.S. has had 21 shutdowns over the past five decades, three of which have been major. These have all caused real harm to the U.S. economy, but they haven’t led to the spending levels Republicans wanted.”</p>
<p>If today’s conservatives are serious about cutting the swelling budget deficit, Scheppach suggested they take a different tack – genuine negotiation – which has generally yielded just the results they sought. </p>
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<a href="https://theconversation.com/gop-shutdown-threat-is-the-wrong-way-to-win-a-budget-war-history-shows-a-better-strategy-for-reducing-the-deficit-213938">GOP shutdown threat is the wrong way to win a budget war − history shows a better strategy for reducing the deficit</a>
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<h2>2. Why political brinkmanship keeps getting worse</h2>
<p>One big problem with negotiation is that many lawmakers in both political parties are encouraged by increasing levels of hyperpartisanship to dig in their heels and refuse to compromise. And compromise is a key part of any reasonable negotiation.</p>
<p>That’s the assessment of <a href="https://scholar.google.com/citations?user=cfH3-8sAAAAJ&hl=en&oi=ao">Laurel Harbridge-Yong</a>, a Northwestern University political scientist and a specialist in partisan conflict. <a href="https://theconversation.com/with-government-funding-running-out-soon-expect-more-brinkmanship-despite-public-dismay-at-political-gridlock-217252">She doesn’t expect this to change anytime soon</a> – even though the public wants it to.</p>
<p>“So you now have many Republicans who are more willing to fight quite hard against the Democrats because they don’t want to give a win to Biden,” Harbridge-Yong wrote. “However, even if individual members think they’re representing their constituents, representation at the aggregate level can be poor. What the public as a whole – which tends to be more moderate – wants is compromise and resolution.”</p>
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<a href="https://theconversation.com/with-government-funding-running-out-soon-expect-more-brinkmanship-despite-public-dismay-at-political-gridlock-217252">With government funding running out soon, expect more brinkmanship despite public dismay at political gridlock</a>
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<h2>3. Shutdowns have long-lasting costs</h2>
<p>The group of Americans most directly affected by a shutdown are federal workers. When a shutdown happens, most are furloughed without pay, while others whose work is deemed essential – such as many in national defense – must still work, but also without getting a paycheck. </p>
<p>When the shutdown ends and the government is funded again, paychecks resume and workers get back pay for however long it lasted. But shutdowns <a href="https://theconversation.com/government-shutdowns-hurt-federal-worker-morale-long-after-paychecks-resume-especially-for-those-considered-nonessential-214431">can have lingering effects on worker morale and retention rates</a>. That drives up the price tag of shutting down the government and can cause long-term damage, wrote <a href="https://scholar.google.com/citations?user=AJLW1HwAAAAJ&hl=en&oi=ao">Susannah Bruns Ali</a>, an assistant professor of public policy and administration at Florida International University. </p>
<p>“Shutdowns lead to more people being more likely to leave government employment – and higher workloads and lower motivation for those who remain,” she explained. “These conditions may feed Republican political goals, but they harm the millions of Americans who depend on competent, timely assistance from the public servants on the government payroll. This ultimately leads to lower work performance and employee retention problems.”</p>
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<a href="https://theconversation.com/government-shutdowns-hurt-federal-worker-morale-long-after-paychecks-resume-especially-for-those-considered-nonessential-214431">Government shutdowns hurt federal worker morale, long after paychecks resume − especially for those considered 'nonessential'</a>
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<h2>4. Shutdowns are uniquely American</h2>
<p>Many other countries also seem to have a great deal of political partisanship, so you might expect fights over government shutdowns to be relatively common. </p>
<p>If you thought that, <a href="https://theconversation.com/shutdowns-are-a-uniquely-american-drama-in-the-uk-its-just-not-parliaments-cup-of-tea-213928">you’d be wrong</a>, according to <a href="https://www.american.edu/sis/faculty/garretm.cfm">Garret Martin</a>, who studies transatlantic relations at the American University School of International Service. </p>
<p>“Other Western democracies experience polarization and political turmoil, too, yet do not experience this problem,” he explained. Take the British system, famous for its raucous Parliamentary sessions: “Government shutdowns just don’t happen – in fact, there has never been one and likely never will be.”</p>
<p>The reason for the difference comes down to four factors, Martin explained: legislative power, ease of passing a budget, political stakes and appropriation rules.</p>
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<a href="https://theconversation.com/shutdowns-are-a-uniquely-american-drama-in-the-uk-its-just-not-parliaments-cup-of-tea-213928">Shutdowns are a uniquely American drama − in the UK, it's just not Parliament's cup of tea</a>
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<p><em>This article was updated on March 1, 2024, to reflect a new short-term funding deal.</em></p><img src="https://counter.theconversation.com/content/224586/count.gif" alt="The Conversation" width="1" height="1" />
Congress is again on the brink of a government shutdown less than four months after the last close call.Bryan Keogh, Managing EditorLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2196112023-12-13T03:58:07Z2023-12-13T03:58:07ZThere’s a glimmer of hope in the mid-year budget update, but inflation is still a big challenge<p>The federal government knows people are doing it tough. Inflation and interest rate pressures have put the cost-of-living at the forefront of voters’ minds. </p>
<p>As the <a href="https://theconversation.com/the-7-charts-that-show-australians-struggling-as-saving-falls-to-near-zero-218924">national accounts data shows</a>, disposable income has fallen. Households have been forced to run down their savings. The household savings ratio has hit its lowest level in 16 years. </p>
<p>The <a href="https://budget.gov.au/content/myefo/index.htm">mid-year budget</a> update released on Wednesday confirms this. The Mid-Year Economic and Fiscal Outlook (MYEFO) estimates the economy is expected to expand by a low 1.75% in 2023–24. It also notes inflation – although moderating – is still too high. The outlook attributes that mainly to global oil prices.</p>
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<p>There is a small glimmer of hope. The update predicts the economy will grow more strongly in 2024-25 due to rising real incomes and charts a decline in real income growth turning around in future years. </p>
<p>Hopefully that will happen. It is the only way Australian households will be able to cope with the cost of living.</p>
<h2>A key challenge for the government</h2>
<p>The challenge facing the government is that it can’t splash cash on easing cost-of-living pain without adding to inflation. Higher inflation would cause the Reserve Bank to raise its interest rate targets even further, making things worse. </p>
<p>There are ways to address the problem. Initiatives in the May budget, including measures to reduce energy and childcare costs, aimed to help households without putting pressure on inflation. The outlook notes these are still being rolled out.</p>
<p>But there are only a limited number of initiatives like this available to governments. Some are tempted to spend budget money instead. Treasurer Jim Chalmers has avoided that temptation. There’s no extra cost-of-living assistance package in this update. Instead, there is determination to rein in debt and deficit.</p>
<h2>The fine line between surplus and deficit</h2>
<p>The MYEFO 2023-24 budget balance is A$1.1 billion. That’s line ball between surplus and deficit. The balance is the difference between two much larger numbers: $685 billion in receipts and $686 billion in payments. </p>
<p>What’s more, these are estimates, not actuals. We won’t know how they turn out until the final budget outcome is released in October next year. In the meantime, we can expect another round of estimates updates in the May 2024 budget. </p>
<p>No self-respecting economist would claim it matters whether Australia has a surplus or deficit. What makes a difference to our national financial sustainability is how a government responds to the economic pressures it faces.</p>
<h2>There are challenges but overall, the outlook is ok</h2>
<p>On that measure, this is a responsible document. The revenue estimates have improved since the May budget, mainly due to global commodity prices. The government has spent little of this windfall. </p>
<p>Chalmers’ MYEFO media release says the government has returned 92% of upward revisions to revenue since the May budget. He says this means the government “will avoid $145 billion over 12 years to 2033-34 in interest costs on the debt we inherited”. </p>
<p>As a result, the forward estimates for the Australian government’s debt and deficit are lower at this point than at budget. Gross debt as a share of GDP is expected to peak at 35.4% of GDP in 2027-28, before declining.</p>
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<p>There is an estimated $9.8 billion in savings, including already announced reductions in infrastructure spending. That was a good measure, because in addition to improving the budget bottom line it will have a direct impact on lowering building costs.</p>
<p>Offsetting those savings are a raft of new spending measures arising from decisions taken since the budget. They include defence support for Ukraine, aged care reform, additional money for ongoing COVID responses, new pharmaceutical benefit scheme listings, national water grid, housing and several hundred more. Many have already been announced. </p>
<p>The report gathers them together and adds them up. They add $1.1 billion to spending in 2023-23, $2.7 billion in 2024-25.</p>
<h2>There are big announcements ahead …</h2>
<p>Sadly, in a blow for budget transparency, there is still a line for decisions taken but not yet announced. We don’t know what decisions these are, but they are significant – the estimates start at $270 million in 2023-24 and rise to $1.8 billion in 2026-27. </p>
<p>It is <a href="https://theconversation.com/16-billion-of-the-myefo-budget-update-is-decisions-taken-but-not-yet-announced-why-budget-for-the-unannounced-173654">impossible to tell</a> what this spending is for. If the government were to reverse those decisions between now and the next budget update, we will never know. </p>
<p>On the plus side, this mid-year report has been released at roughly the mid-point of the financial year. Some previous reports have come out at different times – ranging from mid-October to late January (the latest it can be released under the Charter of Budget Honesty Act).</p>
<p>Chalmers has in the past expressed his desire to move back to a more regular and predictable budget processes. A MYEFO in December is normal and regular. </p>
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<a href="https://theconversation.com/budget-update-forecasts-deficit-of-1-1-billion-this-financial-year-219799">Budget update forecasts deficit of $1.1 billion this financial year</a>
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<p class="fine-print"><em><span>Stephen Bartos does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The economy is expected to grow and there are other positive signs ahead but the mid-year economic update has revealed the government will need to keep inflation in check.Stephen Bartos, Professor of Economics, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2067122023-06-12T14:51:39Z2023-06-12T14:51:39ZKenya’s first budget under Ruto - three experts review its key points<figure><img src="https://images.theconversation.com/files/530556/original/file-20230607-21-tu4xz9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p><em>President William Ruto’s first budget <a href="https://www.treasury.go.ke/wp-content/uploads/2023/05/Public-Notice-on-the-2023_2024-Budget-Day.pdf">comes to the national assembly</a> on 15 June against the backdrop of massive <a href="https://www.treasury.go.ke/wp-content/uploads/2023/02/Medium-Term-Debt-Management-Strategy-2023.pdf#page=18">public debt</a> and public disquiet over <a href="https://www.knbs.or.ke/consumer-price-indices-and-inflation-rates-for-may-2023/">high inflation</a>. The <a href="https://www.treasury.go.ke/wp-content/uploads/2023/02/2023-Budget-Policy-Statement.pdf#page=55">KSh3.663 trillion (US$26.35 billion) plan</a> sets out <a href="https://www.treasury.go.ke/wp-content/uploads/2023/02/2023-Budget-Policy-Statement.pdf">priority areas</a> of an administration that campaigned on the <a href="https://africacheck.org/sites/default/files/media/documents/2022-08/Kenya%20Kwanza%20UDA%20Manifesto%202022.pdf#page=8">platform</a> of empowering the informal sector. Many of the <a href="http://www.parliament.go.ke/sites/default/files/2023-05/THE%20FINANCE%20BILL%20%2C%202023_compressed.pdf">budgetary measures</a> meant to support economic recovery and promote inclusive growth have <a href="https://nation.africa/kenya/news/politics/kenyans-swamp-house-with-petitions-opposing-ruto-s-finance-bill-2023-4249390">caused a public uproar</a> amid <a href="https://nation.africa/kenya/news/pain-anguish-for-hustlers-as-cost-of-living-soars-in-ruto-s-first-140-days-in-power-4103646">high prices</a> of basic commodities. <a href="https://scholar.google.com/citations?user=dTJvuJIAAAAJ&hl=en">Finance scholar</a> Odongo Kodongo, <a href="https://scholar.google.it/citations?user=Tq9mSlMAAAAJ&hl=en">agricultural economist</a> Timothy Njagi and <a href="https://scholar.google.com/citations?view_op=view_citation&hl=en&user=N2N5hBMAAAAJ&citation_for_view=N2N5hBMAAAAJ:EkHepimYqZsC">economist</a> XN Iraki review the key aspects</em>.</p>
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<h2>What’s the government doing to address the budget deficit?</h2>
<p><strong>Odongo Kodongo:</strong> Last year, Ruto <a href="https://www.iol.co.za/news/africa/kenyas-ruto-vows-to-cut-spending-and-borrowing-in-a-move-back-to-sanity-2a50867f-1e76-5adc-8f7e-d1042e4c9f1e">instructed Kenya’s Ministry of Finance</a> to slash KSh300 billion (about US$2.5 billion at the time) from the government’s spending for the 2022/23 fiscal year. That’s a cut of about 9% of the Ksh3.286 trillion that the treasury had <a href="https://www.treasury.go.ke/wp-content/uploads/2022/12/2022-Budget-Review-and-Outlook-Paper.pdf#page=13">expected to spend</a>. </p>
<p>This cut would be a step towards reducing the country’s budget deficit – the difference between government’s spending and its income. The deficit was <a href="https://www.treasury.go.ke/wp-content/uploads/2022/12/2022-Budget-Review-and-Outlook-Paper.pdf">projected at KSh849.2 billion</a> (or 5% of GDP) for the 2022/23 fiscal year. </p>
<p>When the budget deficit is high, it means that more of the government’s planned expenditures must be financed by debt. This causes the amount of public debt to increase. However, at <a href="https://www.treasury.go.ke/wp-content/uploads/2023/02/Press-Release-Government-budget-cut-committment.pdf">about 5.7% of GDP</a>, Kenya’s budget deficit is comparable to that of <a href="https://www.treasury.gov.za/documents/national%20budget/2021/sars/Budget%202021%20Highlights.pdf#:%7E:text=The%202021%20Budget%20proposes%20measures%20to%20narrow%20the,at%2088.9%20per%20cent%20of%20GDP%20in%202025%2F26">South Africa</a> and <a href="https://www.thebalancemoney.com/current-u-s-federal-budget-deficit-3305783">the US</a>. It’s about the same, too, as the average levels recently observed in most <a href="https://www.imf.org/-/media/Files/Publications/fiscal-monitor/2021/Update/January/English/text.ashx#:%7E:text=Fiscal%20responses%20have%20been%20shaped,for%20low%2Dincome%20developing%20countries.">low-income countries</a>. </p>
<p>It’s <a href="https://ntvkenya.co.ke/news/six-months-in-power-how-president-ruto-is-faring-on-his-pledges/">not clear</a> whether the government has achieved the budget cut. The minister has said that <a href="https://www.treasury.go.ke/wp-content/uploads/2023/02/Press-Release-Government-budget-cut-committment.pdf">emergencies and pressing issues</a> such as drought and curriculum changes have required spending. </p>
<p>Ruto’s administration criticises the former administration but continues to borrow just like it did. It <a href="https://www.standardmedia.co.ke/financial-standard/article/2001473475/raising-the-debt-ceiling-kenya-is-in-good-company">recently adjusted the debt ceiling</a> again, replacing the existing ceiling of KSh10 trillion with a “floating” ceiling of <a href="https://www.reuters.com/article/kenya-debt-idUSL1N358275">55% of GDP</a>. This means the government will change its debt annually depending on the country’s economic output. </p>
<p>There’s no real political will to rein in spending. The drive to do so was part of the <a href="https://www.theafricareport.com/228794/kenyas-9-august-elections-imf-sets-new-loan-conditions-limiting-choices-of-the-next-government/#:%7E:text=These%20three%20conditions%2C%20known%20as,its%20fiscal%20gap%20by%202023.">International Monetary Fund’s conditions</a> for funding. </p>
<h2>What does the budget mean for the agricultural sector?</h2>
<p><strong>Timothy Njagi:</strong> Ruto’s administration has tried to keep some of the election promises made. The budget proposals are consistent with some of these.</p>
<p>First, the government committed to enhancing access and reducing the costs of inputs – mainly through fertiliser subsidies. The government <a href="https://kilimo.go.ke/fertilizer-subsidy-2022/">reintroduced</a> the subsidy that offered fertiliser at 50% of the market price. </p>
<p>My take is that the subsidy is justified, but doing it through the National Cereals and Produce Board is a poor choice for the model of delivery. The model, where the government procures fertiliser and farmers collect it from the nearest cereal board depot, <a href="https://econpapers.repec.org/article/agsafjare/252459.htm">does not enhance access</a> as distribution is concentrated in areas with high maize growing potential. The distance from farming households to the nearest depot is far, and the transport costs reduce the cost saving. </p>
<p>Second, the government committed to reducing the cost of food. It aims to raise agricultural productivity and reduce reliance on imports for food security. Although the government has waived import duties and the finance bill proposes to reduce some levies (import declaration levy and railway development levy), the measures have been countered by a rising exchange rate and <a href="https://www.fao.org/worldfoodsituation/foodpricesindex/en/">high global food prices</a>.</p>
<p>Success in raising agricultural productivity depends to a great extent on the performance of county governments. While county governments have allocated better proportions of their budget to the <a href="https://www.tegemeo.org/images/County_AgPER_WP2_02.05.23_revised.pdf">agricultural sector (6%)</a> compared to the national government (2%), they have to invest in extension services. </p>
<p>The commitment to finance the agricultural sector was quite low (KSh250 billion over five years) in view of challenges such as lack of extension services and climate-related shocks.</p>
<p>Third, the Finance Bill has some measures that will benefit agro-processing industries. The removal of annual inflation adjustments to the excise duty will create a predictable environment. Excise duty on imported food is intended to protect local producers, but it must be accompanied by investments to make them more competitive. Imposing export levies on raw primary products is an incentive to local value addition and this could potentially create employment.</p>
<p>There are some concerns about tax changes that could raise the cost of production for farmers in the short term. There is also a need for consistency in the value added tax policy as it has kept changing since 2013.</p>
<h2>Does the budget deliver Ruto’s promise to transform the manufacturing sector?</h2>
<p><strong>XN Iraki:</strong> Manufacturing <a href="https://www.treasury.go.ke/wp-content/uploads/2023/05/KNBS-Popular-Version-BOOK-PRESS-%E2%88%9A.pdf#page=16">contributed</a> only 7.8% of GDP in 2022. This is well below many African countries, including <a href="https://data.worldbank.org/indicator/NV.IND.MANF.ZS?locations=ZG">Uganda, Ghana, Nigeria and Eswatini</a>. </p>
<p>To support manufacturing, the Kenyan budget outlines a number of investments, incentives and taxation measures. Top of these, in my view, is the revival of Kenya Industrial Estates – a state agency established to <a href="https://www.researchgate.net/publication/263587303_INFLUENCE_OF_KENYA_INDUSTRIAL_ESTATES_SERVICES_TO_THE_GROWTH_OF_MICRO_AND_SMALL_ENTERPRISES_IN_KENYA">promote</a> micro and small scale industries. </p>
<p>There is also a <a href="https://ushirika.go.ke/">new ministry</a> to oversee the involvement of small and medium enterprises in manufacturing. The budget includes plans to <a href="https://www.treasury.go.ke/wp-content/uploads/2023/02/2023-Budget-Policy-Statement.pdf#page=14">establish</a> a small and micro enterprise development centre in every ward, as well as an industrial park and business incubation centre in every technical and vocational education and training institution.</p>
<p>Funding for research and development will rise from 0.8% in the next fiscal year to 1% of GDP after three years but this is low <a href="https://www.statista.com/statistics/732269/worldwide-research-and-development-share-of-gdp-top-countries/">compared</a> with, say, Israel, which put 4.8% of its GDP into research and development in 2022. Israel is a leader in <a href="https://embassies.gov.il/london/AboutIsrael/economy/Pages/ECONOMY-%20Sectors%20of%20the%20Economy.aspx">innovation</a>, more so in agriculture. </p>
<p>The budget policy statement says there will be more investment in technical and vocational training. The government also intends to halt the conversion of polytechnics into universities so the country can produce more graduates with technical skills. This is reinforced by training and professional development opportunities for manufacturing workers.</p>
<p>The budget policy seeks to give manufacturers incentives to invest in employee training. It proposes extension of the <a href="https://agoa.info/about-agoa.html">African Growth and Opportunity Act</a> beyond 2025 and offers tax incentives for exporters. </p>
<p>Ruto also intends to support agro-processing and value addition to agricultural exports. This is a good step in a country where almost a quarter of the GDP comes from agriculture.</p>
<p>The budget is a good start but it has to be implemented. Manufacturing was a priority sector for Mwai Kibaki’s and Uhuru Kenyatta’s administrations. The <a href="https://kam.co.ke/kenya-manufacturers-aim-to-contribute-20-of-countrys-gdp-by-2030/">targeted</a> 20% contribution of manufacturing to GDP needs a lot of work.</p><img src="https://counter.theconversation.com/content/206712/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Ruto’s administration continues to borrow, just like the previous regime.XN Iraki, Associate Professor, Faculty of Business and Management Sciences, University of NairobiOdongo Kodongo, Associate professor, Finance, University of the WitwatersrandTimothy Njagi Njeru, Research Fellow, Tegemeo Institute, Egerton UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2061742023-05-28T17:15:23Z2023-05-28T17:15:23ZDebt ceiling negotiators reach a deal: 5 essential reads about the tentative accord, brinkmanship and the danger of default<figure><img src="https://images.theconversation.com/files/528698/original/file-20230528-145930-1dir73.jpeg?ixlib=rb-1.1.0&rect=49%2C437%2C7766%2C4957&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Biden speaks to reporters about the tentative accord. </span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/DebtLimit/5f4e2743ebcf4b4795d386cd54ea90d4/photo?Query=debt%20ceiling&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=1041&currentItemNo=0">AP Photo/Susan Walsh</a></span></figcaption></figure><p>President Joe Biden and House Speaker Kevin McCarthy on May 27, 2023, <a href="https://www.bloomberg.com/news/articles/2023-05-28/white-house-republicans-reach-deal-to-avert-historic-us-default">agreed in principle to a tentative deal</a> that would raise the debt ceiling while capping some federal spending at current levels.</p>
<p>The accord, if approved by both houses of Congress, would avert an unprecedented default that threatens to derail the economy and put hundreds of thousands of Americans out of work. Negotiators agreed to lift the ceiling for two years – past the 2024 presidential election – while putting a temporary cap on most nondefense spending at 2023 levels. It would also reduce planned funding for the IRS, impose new work requirements on some people who receive benefits from the federal program known as SNAP and claw back billions of unspent funds from pandemic relief programs.</p>
<p>The Conversation has been covering the debt ceiling drama since January, when Republicans took over the House, raising fears that brinkmanship would lead to an economic catastrophe. Here are five articles from our archive to help you make sense of a couple key aspects of the tentative deal and provide context on the debt ceiling fight.</p>
<h2>1. What is the debt ceiling?</h2>
<p>First some basics. The debt ceiling was established by the U.S. Congress in 1917. It limits the total national debt by setting out a maximum amount that the government can borrow.</p>
<p>Steven Pressman, an <a href="https://ww4.newschool.edu/nssr/faculty/steven-pressman/">economist at The New School</a>, explained the original aim was “to let then-President Woodrow Wilson spend the money he deemed necessary to fight World War I without waiting for often-absent lawmakers to act. Congress, however, did not want to write the president a blank check, so it limited borrowing to US$11.5 billion and required legislation for any increase.”</p>
<p>Since then, the debt ceiling has <a href="https://theconversation.com/why-america-has-a-debt-ceiling-5-questions-answered-164977">been increased dozens of times</a>. It currently stands at $31.4 trillion – a figure reached in January. The Treasury has taken “extraordinary measures” to enable the government to keep borrowing without breaching the ceiling. Such measures, however, can only be temporary – meaning at one point Congress will have to act to lift the ceiling or default on its debt obligations, which is expected to happen by June 5, <a href="https://www.reuters.com/markets/us/yellen-moves-forecast-earliest-potential-us-default-date-june-5-2023-05-26/">according to Treasury Secretary Janet Yellen</a>, if the deal isn’t approved in time.</p>
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Read more:
<a href="https://theconversation.com/why-america-has-a-debt-ceiling-5-questions-answered-164977">Why America has a debt ceiling: 5 questions answered</a>
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<h2>2. The trouble with work requirements</h2>
<p>One of the biggest sticking points toward the end of negotiations was work requirements for recipients of government aid. The tentative deal would raise the age for existing work requirements from 49 to 54 years on able-bodied adults who have no children. This is less than what Republicans had earlier sought. There are exceptions for veterans and the homeless. </p>
<p>But if the goal is to help people find jobs and make more money, work requirements <a href="https://theconversation.com/snap-work-requirements-dont-actually-get-more-people-working-but-they-do-drastically-limit-the-availability-of-food-aid-204257">don’t actually do the job</a>, wrote <a href="https://scholar.google.com/citations?user=Zoc5_aMAAAAJ&hl=en&oi=ao">Kelsey Pukelis</a>, a doctoral student in public policy at Harvard Kennedy School who has studied the issue. Rather, they make it much harder for people who need food aid to get it. </p>
<p>“Our findings do suggest that work requirements restrain federal spending by reducing the number of people getting SNAP benefits,” she explained. “But our work also indicates that in today’s context, these savings would be at the expense of already vulnerable people facing additional economic hardship at a time when a new recession could be around the corner.”</p>
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Read more:
<a href="https://theconversation.com/snap-work-requirements-dont-actually-get-more-people-working-but-they-do-drastically-limit-the-availability-of-food-aid-204257">SNAP work requirements don’t actually get more people working – but they do drastically limit the availability of food aid</a>
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<h2>3. IRS funding takes a hit</h2>
<p>The deal also takes aim at a big boost in spending Congress gave the Internal Revenue Service beginning in 2022 to crack down on tax cheats and upgrade its software. Democrats agreed to a Republican demand to cut the extra IRS funding from $80 billion to $70 billion. </p>
<p>Back in August 2022, <a href="https://scholar.google.com/citations?user=J_S5pkkAAAAJ&hl=en&oi=ao">Nirupama Rao</a>, an economist at the University of Michigan, <a href="https://theconversation.com/will-the-inflation-reduction-act-actually-reduce-inflation-how-will-the-corporate-minimum-tax-work-an-economist-has-answers-188786">explained why Democrats included all that funding</a> in their Inflation Reduction Act and how it would help the IRS collect more tax revenue, since the agency does not fully collect all the taxes that are owed.</p>
<p>“The main target of this spending is the so-called tax gap, which is currently estimated at about $600 billion a year,” she wrote. “While an $80 billion investment that returns $204 billion already sounds pretty impressive, it may be possible that it’s a conservative estimate.”</p>
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Read more:
<a href="https://theconversation.com/will-the-inflation-reduction-act-actually-reduce-inflation-how-will-the-corporate-minimum-tax-work-an-economist-has-answers-188786">Will the Inflation Reduction Act actually reduce inflation? How will the corporate minimum tax work? An economist has answers</a>
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<h2>4. The hard road to compromise</h2>
<p>It took a long time for Republicans and Democrats to get the current agreement. </p>
<p>Yellen warned in January that the government was about to hit the debt limit and would be unable to pay all its bills by May or June. McCarthy and House Republicans, who hold a razor-thin majority, appeared unwilling to raise the debt ceiling unless they could extract <a href="https://apnews.com/article/debt-limit-bill-house-republicans-kevin-mccarthy-f73e6c2fce8abdfab4973c727ea79517">deep spending cuts</a>. Meanwhile, Biden <a href="https://www.reuters.com/world/us/biden-will-talk-budget-wont-negotiate-debt-ceiling-congress-meeting-white-house-2023-05-02/">refused to negotiate</a>, insisting on a clean debt ceiling bill. Both of those positions were dropped during negotiations. </p>
<p>Why did it take so long for them to reach a compromise? </p>
<p>Blame political trends that have been accelerating for decades, explained <a href="https://scholar.google.com/citations?user=cfH3-8sAAAAJ&hl=en&oi=ao">Laurel Harbridge-Yong</a>, a specialist in partisan conflict and the lack of bipartisan agreement in American politics at Northwestern University. Many Republicans come from very safe districts, which means their primary against other conservatives is more important than the general election. <a href="https://theconversation.com/most-voters-want-compromise-in-congress-so-why-the-brinkmanship-over-the-debt-limit-206465">This makes it more important to stand firm</a> and fight until the bitter end. </p>
<p>“So you now have many Republicans who are more willing to fight quite hard against the Democrats because they don’t want to give a win to Biden,” she wrote. “Democrats are also resistant to compromising, both because they don’t want to gut programs that they put in place and also because they don’t want to make this look like a win for Republicans, who were able to play chicken and get what they wanted.”</p>
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Read more:
<a href="https://theconversation.com/voters-want-compromise-in-congress-so-why-the-brinkmanship-over-the-debt-ceiling-206465">Voters want compromise in Congress -- so why the brinkmanship over the debt ceiling?</a>
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<h2>5. Latest in a long line of fiscal crises</h2>
<p>This was hardly the first fiscal crisis the U.S. government has faced. In fact, there have been many – including 22 government shutdowns since just 1976. </p>
<p><a href="https://www.linkedin.com/in/raymond-scheppach-19b98536">Raymond Scheppach</a>, a professor of public policy at University of Virginia, <a href="https://theconversation.com/link-205178">offered a brief history</a> of recent crises and the damage they’ve caused – and why a default would be far more consequential than past crises.</p>
<p>“While these were very disruptive and damaged the economy and employment, they pale in comparison to the potential effects of failing to lift the debt ceiling, which could be catastrophic,” he wrote. “It could bring down the entire international financial system. This in turn could devastate the world gross domestic product and create mass unemployment.”</p>
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Read more:
<a href="https://theconversation.com/a-brief-history-of-debt-ceiling-crises-and-the-political-chaos-theyve-unleashed-205178">A brief history of debt ceiling crises and the political chaos they've unleashed</a>
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<p><em>Editor’s note: This story is a roundup of articles from The Conversation’s archives. Portions of this article originally appeared in <a href="https://theconversation.com/yellen-puts-congress-on-notice-over-impending-debt-default-date-5-essential-reads-on-whats-at-stake-204863">a previous article</a> published on May 2, 2023.</em></p><img src="https://counter.theconversation.com/content/206174/count.gif" alt="The Conversation" width="1" height="1" />
The deal would raise the ceiling for two years, cap some federal spending and impose new work requirements on certain federal benefits. It still needs the blessing of Congress.Bryan Keogh, Managing EditorMatt Williams, Senior International EditorLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1983632023-02-01T13:20:49Z2023-02-01T13:20:49ZI helped balance the federal budget in the 1990s – here’s just how hard it will be for the GOP to achieve that same rare feat<figure><img src="https://images.theconversation.com/files/506717/original/file-20230127-14-dnxa9d.jpg?ixlib=rb-1.1.0&rect=53%2C58%2C2903%2C1884&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Bill Clinton, at right, oversaw the first balanced budget since 1969, with some help from a bipartisan deal with Newt Gingrich.</span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/PresidentBillClintonHandshakeNewtGingrich/0bb5ca6edcaf46bd97a5b7bda3ab6cfc/photo?Query=clinton%20gingrich&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=73&currentItemNo=24">AP Photo/Doug Mills</a></span></figcaption></figure><p>Kevin McCarthy reportedly <a href="https://www.vox.com/policy-and-politics/2023/1/6/23542817/kevin-mccarthy-speaker-deal-congress-debt-ceiling">promised many things</a> to Republican hardliners en route to clinching his job as speaker of the U.S. House of Representatives. <a href="https://www.brookings.edu/blog/fixgov/2023/01/10/mccarthy-paid-a-steep-price-for-his-speakership-now-what/">One of them</a> was a “balanced budget” in 10 years. </p>
<p>As part of that plan, Republicans <a href="https://www.foxnews.com/opinion/house-republicans-right-no-debt-limit-increase-until-balanced-budget-plan-place">are demanding substantial spending cuts</a> and budget reforms in exchange for lifting the debt ceiling this year – <a href="https://theconversation.com/link-164977">putting the U.S. at risk of default</a>.</p>
<p>But a look at the numbers – and the history – shows just how difficult balancing the budget will be. </p>
<p>Doing so requires the federal government to generate enough income to pay for all its spending. The U.S. <a href="https://www.whitehouse.gov/omb/budget/historical-tables/">has managed this feat only twice</a> in the past 60 years – and both times involved raising taxes, something <a href="https://www.forbes.com/sites/howardgleckman/2023/01/17/balancing-the-federal-budget-in-10-years-without-raising-taxes-is-impossible/?sh=5fe413c215b3">Republicans are loath to do</a>. President Lyndon B. Johnson managed to do it in 1969, and President Bill Clinton created a surplus that ran from the fiscal years 1998 to 2001, when he left office. </p>
<p>As a <a href="https://www.hks.harvard.edu/faculty/linda-bilmes">member of the Clinton administration</a> in the Commerce Department from 1997 to 2001, I participated in achieving that rare balanced budget and understand the obstacles to delivering a repeat performance. A quick look back at how we did it, along with how much has changed, shows that Republicans are unlikely to manage a similar performance. </p>
<h2>How Clinton balanced the budget</h2>
<p>When Clinton took office in 1993, the budget deficit in the previous year <a href="https://fred.stlouisfed.org/series/FYFSGDA188S">was just under 5% of gross domestic product</a>, and the nonpartisan Congressional Budget Office <a href="https://www.cbo.gov/sites/default/files/103rd-congress-1993-1994/reports/93doc03.pdf">predicted a bleak fiscal outlook</a>. </p>
<p>Clinton’s balanced-budget recipe was a mixture of higher revenues and lower spending, with help from a booming economy. In his second term, he also negotiated a bipartisan budget deal with Republicans. </p>
<p>After <a href="https://www.nytimes.com/1993/01/07/us/clinton-backs-off-his-pledge-to-cut-the-deficit-in-half.html">campaigning on a pledge to cut the deficit</a>, Clinton raised taxes on the wealthy during his first year in office. He <a href="https://www.investopedia.com/terms/t/tax-reform-act-of-1993.asp">introduced higher top personal income tax brackets</a>, raised corporate taxes, increased taxes on Social Security benefits, added 4.3 cents per gallon onto gas taxes and eliminated a number of itemized tax deductions. On the spending side, Clinton took advantage of the “<a href="https://www.newsweek.com/peace-dividend-169570">peace dividend</a>” that followed the collapse of the Soviet Union to reduce defense spending from 4.3% of GDP in 1993 to 2.9% by 2000.</p>
<p>These measures helped <a href="https://fred.stlouisfed.org/series/FYFSGDA188S">slash the overall deficit</a> to 1.3% of GDP by the end of Clinton’s first term. That’s the smallest it had been in 22 years. </p>
<p>The higher taxes invited pushback from Republicans, who gained majorities in the House and Senate in 1995. Clinton wrangled continually with then-Republican Speaker Newt Gingrich, who <a href="https://www.npr.org/2019/01/12/683304824/the-longest-government-shutdown-in-history-no-longer-how-1995-changed-everything">forced a government shutdown</a> that same year. </p>
<p>As part of budget negotiations, Congress eventually passed the <a href="https://www.cbpp.org/sites/default/files/archive/908mcaid.htm">Balanced Budget Act of 1997</a>, which retained Clinton’s original tax increases but cut capital gains taxes and reduced spending on Medicare and Medicaid. Meanwhile, the economy, fueled by a tech boom, <a href="https://www.stlouisfed.org/publications/regional-economist/second-quarter-2017/growth-in-tech-sector-returns-to-glory-days-of-the-1990s">expanded rapidly</a> during Clinton’s second term. </p>
<p>Higher tax rates on the wealthiest Americans, strong economic growth and continued restraint in government spending <a href="https://fred.stlouisfed.org/series/FYFSD">produced a budget surplus of US$69 billion</a> in 1998. The surplus peaked in 2000 at $236 billion before falling to $128 billion in 2001. The surplus – which hasn’t been seen since – allowed the U.S. to pay down the national debt by over $450 billion. </p>
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<h2>Lessons for today</h2>
<p>The lesson for Republicans today is that if they are serious about balancing the budget, it will require some very unpalatable choices. </p>
<p>On the spending side, so-called entitlements – mandatory programs such as Social Security, Medicare and veterans benefits – now <a href="https://www.cbpp.org/research/federal-budget/introduction-to-the-federal-budget-process">account for almost two-thirds of the federal budget</a>, compared with <a href="https://sgp.fas.org/crs/misc/RL33074.pdf">less than half</a> when Clinton took office. Funding for these programs is set by formula, making it difficult to change. And the population of Americans 65 or older <a href="https://usafacts.org/data/topics/people-society/population-and-demographics/our-changing-population?endDate=2021-01-01&startDate=1993-01-01">has grown by 32%</a> since 1993, increasing demand for entitlements. </p>
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<img alt="A group of white man clap as president Clinton sits on at desk with the words a balanced budget witten in front" src="https://images.theconversation.com/files/506719/original/file-20230127-25-frc5dm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/506719/original/file-20230127-25-frc5dm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=756&fit=crop&dpr=1 600w, https://images.theconversation.com/files/506719/original/file-20230127-25-frc5dm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=756&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/506719/original/file-20230127-25-frc5dm.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=756&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/506719/original/file-20230127-25-frc5dm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=950&fit=crop&dpr=1 754w, https://images.theconversation.com/files/506719/original/file-20230127-25-frc5dm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=950&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/506719/original/file-20230127-25-frc5dm.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=950&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">When Clinton signed the Balanced Budget Act of 1997, it was the first time since 1969 that the U.S. had made ends meet.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/house-majority-leader-newt-gingrich-r-ga-applaudes-us-news-photo/52023875?phrase=clinton%20gingrich">Paul Richards/AFP via Getty Images</a></span>
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<p><a href="https://www.cbpp.org/research/federal-budget/introduction-to-the-federal-budget-process">Defense spending takes up another 14%</a> of taxpayer dollars, greatly exceeding every other item in the so-called discretionary budget, which includes everything else from transportation and energy to airline traffic control and national parks.</p>
<p>The U.S. spends 8% of the budget simply paying interest on the national debt. This percentage hasn’t changed much, but the debt itself has soared from $4.5 trillion in 1993 to <a href="https://www.usdebtclock.org/">$31 trillion today</a> <a href="https://www.nytimes.com/2023/01/22/business/economy/federal-debt-history.html">mainly because of massive tax cuts</a> during the Bush and Trump administrations, costly wars in Iraq and Afghanistan and vast public spending to address the 2008 financial crisis and the COVID-19 pandemic.</p>
<p>Now that historically low interest rates <a href="https://www.ft.com/content/6d312b6c-9f74-4816-ad7e-7e797c5e0f6b">have come to an end</a>, the U.S. will be forced to devote a bigger slice of the pie to paying interest. </p>
<p>The policy nonprofit Committee for a Responsible Federal Budget <a href="https://www.crfb.org/blogs/what-would-it-take-balance-budget">recently estimated</a> that if spending on defense, veterans, Social Security and Medicare were off the table, Congress would need to reduce all other spending by 85% to get to an overall balance. In other words, simple arithmetic means it is not feasible to achieve anything close to a balanced budget without addressing military spending and entitlement programs. </p>
<p>Reducing military spending is always controversial – and many Republicans (as well as some Democrats) would resist such cuts – but especially so at a time when the U.S. is ramping up military aid to Ukraine and the Pentagon perceives a threat from China. It’s the very opposite of the Clinton-era peace dividend. </p>
<p>Cutting mandatory spending would require significant reforms. The U.S. has one of the youngest minimum retirement thresholds in the world, at age 62, compared with 65 in Canada and 67 in Britain and Germany. Even France <a href="https://apnews.com/article/france-retirement-age-limit-protests-866eb86aea5cf0d39894b96d2888c26f">may soon have a higher minimum retirement age</a> of 64 – though the current protests there over increasing it from 62 illustrate the political perils of such a change.</p>
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<h2>Can they do it again?</h2>
<p>Certainly, opportunities do exist to close the gap between income and spending. </p>
<p>The Congressional Budget Office has released a <a href="https://www.cbo.gov/publication/58163">report outlining 76 options</a> for reducing the deficit. But many of the ideas require further hard choices, such as rolling back some or all of the last three tax cuts, increasing taxes on the wealthy, ending or curtailing tax deductions and adopting a consumption-based value-added tax or a <a href="https://theconversation.com/us/topics/carbon-tax-320">carbon tax</a>, as well as fundamental reforms to entitlement programs. </p>
<p>Unfortunately, Congress shows limited appetite to tackle such issues.</p>
<p>Back in 1997, after the smoke cleared, both the Clinton administration and the Republicans in Congress were able to claim some political credit for the resulting budget surpluses. But – crucially – both parties recognized that a deal was in the best interest of the country and were able to line up their respective members to get the votes in Congress needed to approve it. The contrast with the current political landscape is stark. </p>
<p>The Republican Study Committee, a bloc of more than 160 conservative lawmakers, <a href="https://banks.house.gov/uploadedfiles/rsc_2023_budget_final_version.pdf">released a budget blueprint</a> in June 2022 that promises to balance the budget in seven years. The plan proposes trillions of dollars in spending cuts, many of which would fall hardest on low-income Americans. These include shrinking Medicaid, paring veterans benefits and raising the age for full Social Security retirement benefits from 67 to 70. It also calls for higher military spending and further tax cuts – which would require even more draconian cuts to core safety net programs. </p>
<p>It would also lock in the Trump tax cuts of 2017 – the opposite of what the Congressional Budget Office recommends or what Clinton did in the 1990s to secure a balanced budget. </p>
<p>Without a credible Republican deficit-cutting plan on the table, I believe that the odds favor a protracted stand-off over the debt ceiling, which <a href="https://theconversation.com/us-debt-default-could-trigger-dollars-collapse-and-severely-erode-americas-political-and-economic-might-198395">could tip the precarious U.S. economy</a> into recession.</p>
<p>While Congress <a href="https://www.econlib.org/archives/2018/04/the_us_is_unlik.html">seems highly unlikely</a> to allow a debt default, this brawl would waste time and energy that could be better spent on figuring out how to strengthen programs like Social Security and close tax loopholes that drain revenue. </p>
<p>Balancing the budget is not an end in itself. <a href="https://www.cbpp.org/research/federal-budget/deficits-debt-and-interest#:%7E:text=When%20interest%20rates%20rise%20or,and%201.6%20percent%20of%20GDP">Most economists agree</a> that governments should reduce public debt during periods of prosperity and run deficits to assist people when the economy is weak. </p>
<p>The U.S. was fortunate in the late 1990s to enjoy a buoyant economy that enabled Congress and the president to achieve a fiscal surplus. What the country needs now, in my view, is not more quick fixes but a sustainable pathway to stabilizing the national debt. That requires growing revenues and reducing nonessential spending in a responsible way.</p><img src="https://counter.theconversation.com/content/198363/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Linda J. Bilmes is the Daniel Patrick Moynihan Senior Lecturer in Public Policy and Public Finance at the Harvard Kennedy School, Harvard University. She is affiliated with the National Academy of Public Administration, where she serves on the Board of Directors, and the United Nations Committee of Experts on Public Administration, where she is the member for the United States. She served as the Senate-confirmed Assistant Secretary and CFO of the US Department of Commerce from 1999-2001, and as Deputy Assistant Secretary of Commerce for Administration and Budget from 1997-1998. </span></em></p>House Speaker McCarthy wants to put the US on a path to a balanced budget as debt ceiling negotiations begin with President Biden. Here’s why it won’t be easy to repeat what Bill Clinton accomplished.Linda J. Bilmes, Daniel Patrick Moynihan Senior Lecturer in Public Policy and Public Finance, Harvard Kennedy SchoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1931092022-10-24T11:31:22Z2022-10-24T11:31:22ZBudget deficit this financial year to be $36.9 billion<figure><img src="https://images.theconversation.com/files/491509/original/file-20221024-5833-2ag00g.png?ixlib=rb-1.1.0&rect=107%2C395%2C3790%2C2221&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Mick Tsikas/AAP</span></span></figcaption></figure><p>Treasurer Jim Chalmers has said the budget bottom line will be more than $40 billion better over the four-year forward estimates in total than previously forecast. </p>
<p>The forecast for gross debt will also be lower than earlier estimates. </p>
<p>The 2022-23 deficit is forecast to be $36.9 billion, compared to a forecast of $78 billion in the March budget delivered by then-treasurer Josh Frydenberg. </p>
<p>The government says this bottom line improvement is primarily the result of its work to return back to the budget a big majority of the revenue upgrade rather than use it for new spending. </p>
<p>The upgrade has mainly come from higher commodity prices and strong employment numbers and amounts to more than $100 billion over the forward estimates. </p>
<p>Over the four year period, the budget bottom line is estimated to be more than $42 billion better than what was expected in March. </p>
<p>But after an early improvement, the deficits are forecast to worsen towards the end of the forward estimates, compared to earlier forecasts. </p>
<p>This is because the drivers of the revenue upgrades fade and there are surging spending pressures – especially from the National Disability Insurance Scheme and interest payments on debt– substantially higher than forecast in March. </p>
<p>The trend underlines the need for the government to rein in spending in later budgets if it wants to continue budget repair. It has already announced a review of the NDIS, which is headed for a cost of about $50 billion by mid-decade.</p>
<p>On the tax side, the government is hamstrung by election commitments not to change the Stage 3 tax cuts or introduce new taxes. But the budget will see action to prevent multi-nationals’ tax avoidance. This was the one new tax measure Labor promised at the election. </p>
<p>The budget will also show gross debt is lower every year over the forward estimates compared to the March budget numbers. </p>
<p>It will contain a long list of election promises that are being fulfilled, including on child care (a budget centrepiece), cheaper medicine, and additional university and TAFE places. The government says measures such as better child care support and cheaper medicines will help the cost of living pressures people face. </p>
<p>Prime Minister Anthony Albanese said on Monday the budget “deals with cost of living pressures while not putting pressure on inflation”. </p>
<p>Chalmers said: “The primary influence on this budget is inflation. We are putting a premium on restraint and resilience because that’s what the times call for”. </p>
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<a href="https://theconversation.com/australias-growth-downgraded-and-inflation-drives-massive-rise-in-cost-of-pensions-and-payments-in-budget-193089">Australia's growth downgraded and inflation drives massive rise in cost of pensions and payments in budget</a>
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<p>Two Coalition regional programs are set for the scrap heap, while Labor is setting up two of its own. </p>
<p>Infrastructure Minister Catherine King announced the government would not go ahead with the Building Better Regions Fund Round 6. The saving from abolishing this round is about $250 million. </p>
<p>King said the Audit Office had found the grants favoured Nationals’ seats and had been awarded on the basis of rules not made clear to all applicants. </p>
<p>Also to go will be the Community Development Grants program, although there will be a pathway for those CDG projects properly accounted for up to the Pre-election Economic and Fiscal outlook statement to be alternatively funded. </p>
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<a href="https://theconversation.com/floods-drive-up-fruit-and-veg-prices-while-energy-costs-will-prolong-high-inflation-193014">Floods drive up fruit and veg prices, while energy costs will prolong high inflation</a>
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<p>“All contracted projects will be honoured, and a further 82 projects that date back to 2016 and that are yet to be contracted will have six months to finalise negotiations before the program ends,” King’s statement said</p>
<p>Some $1 billion over three years will be devoted to the new regional programs. </p>
<p>A Growing Regions Program will see regional local councils and not-for-profit organisations compete for grants. </p>
<p>A regional Precincts and Partnership Program will provide “a strategic, nationally consistent mechanism for funding and co-ordinating larger-scale projects that transform a place” for regional cities and wider rural and regional areas. </p>
<p>Meanwhile Sky reported on Monday the budget would predict a rise in power prices of 30-40%. </p>
<p>The NSW treasurer Matt Kean said: “I’d like to see the federal government take the national energy issues very seriously and support households with funding and support in this budget”.</p><img src="https://counter.theconversation.com/content/193109/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michelle Grattan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Over the forward estimates, the budget bottom line is estimated to be $42 billion better than what was expected in March.Michelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1926592022-10-23T08:35:57Z2022-10-23T08:35:57ZNigeria’s 2023 budget is a plan of despair and won’t change the tempo of the economy<figure><img src="https://images.theconversation.com/files/490632/original/file-20221019-17-8yizmx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Nigeria's 2023 budget may not address food inflation. </span> <span class="attribution"><span class="source">Gettyimages/istock</span></span></figcaption></figure><p>Nigeria’s <a href="https://www.budgetoffice.gov.ng/index.php/resources/internal-resources/call-circular/2023">2023 budget</a>, recently presented by President Muhammadu Buhari to the National Assembly, has generated a furore. </p>
<p>There are concerns about the impact on the country’s <a href="https://www.reuters.com/world/africa/nigerias-public-debt-rises-103-billion-second-quarter-2022-09-20/">rising deficits and debt</a>, as well as its failure to address some of the structural deficiencies behind declining revenues and <a href="https://thenationonlineng.net/rising-deficit-declining-revenue-raise-concerns-over-n20-51tr-2023-budget/">rising inflation</a>.</p>
<p>The 2023 budget <a href="https://businessday.ng/opinion/article/full-text-of-president-muhammadu-buharis-2023-budget-speech/">expenditure</a> of 20.51 trillion naira (US$43.7 billion) is the highest ever. More than half of this is money the government doesn’t have and has to be financed with new debt. This will mean that the country exceeds the 3% of GDP threshold stipulated by the <a href="https://internationalbudget.org/wp-content/uploads/Nigeria-FiscalResponsibilityAct2007-English.pdf">Fiscal Responsibility Act of 2007</a> – a pointer to the worsening of the country’s fiscal health.</p>
<p>More than 60% of the 2023 budget will finance debt repayments (N6.31 trillion), personnel costs (N4.99 trillion) and overheads (N1.11 trillion). This leaves very little for spending to revitalise the economy and raise its growth potential.</p>
<p>Rather than being a budget of hope, Buhari’s proposal is a budget of despair. It won’t significantly change the tempo of the economy. Nor will it reduce the country’s high unemployment, poverty and inflation rates. </p>
<p>In fact it could worsen Nigeria’s cycle of deficits and debts, without the possibility of fostering structural transformation, diversifying the economy, promoting sustainable economic growth, and reducing unemployment and poverty. </p>
<h2>Endless cycle of deficits</h2>
<p>The budget is consistent with previous Buhari administration budgets. </p>
<p>Most importantly, it doesn’t address structural deficiencies in the Nigerian economy. These include the lack of diversification and non-oil sources of revenue. These have been responsible for the country’s cycle of high <a href="https://www.reuters.com/world/africa/nigerias-budget-deficit-will-widen-478-fuel-subsidy-end-2022-10-07/">budget deficits</a> and <a href="https://www.vanguardngr.com/2022/09/why-nigeria-is-in-debt-dmo-dg/">government debts</a>.</p>
<p>The 2023 <a href="https://thenationonlineng.net/roads-rail-varsities-priority-in-n20-5tr-2023-budget/">budget prioritises</a> investment in road and rail projects, power projects, clean water, construction of irrigation infrastructure and dams across the country, and critical health projects.</p>
<p>These are all well and good, but it’s unclear how they will reduce the <a href="https://theconversation.com/nigerias-economy-four-priorities-the-next-president-must-deliver-on-189022">high unemployment</a> and poverty rates in the country. These projects are not widespread and labour-intensive enough to absorb millions of unemployed Nigerians. </p>
<p>It is also unclear how many of the projects will be completed, given the propensity for successive governments in Nigeria to <a href="https://www.vanguardngr.com/2021/12/nigerias-56000-abandoned-projects/">abandon projects</a>. </p>
<p>The biggest problem is that the budget fails to address the issue of diversifying the economy. This is vividly reflected in its title: <a href="https://www.thecable.ng/n9-7trn-projected-revenue-n10-7trn-deficit-highlights-of-2023-budget-proposal">Fiscal Sustainability and Transition</a>. </p>
<p>One cannot have fiscal sustainability without structural transformation. This involves resources being reallocated from low-productivity to high-productivity sectors of the economy. The budget made only a tepid reference to the manufacturing sector. Yet this could deliver a number of benefits.</p>
<p>The first is jobs. Manufacturing uses more labour per unit of output and could absorb the <a href="https://guardian.ng/opinion/unemployment-and-a-nations-40-per-cent-of-hopelessness/">high number</a> of unemployed and underemployed Nigerians. Nigeria’s informal sector contributes about <a href="https://punchng.com/80-4-of-nigerian-employment-in-informal-sector-says-wbank/">80%</a> of the country’s employment, making it difficult to collect taxes. An increase in the number of Nigerians in formal sector jobs would raise more income taxes and reduce the need for borrowing. Manufacturing enterprises also tend to be <a href="https://businessday.ng/companies/article/how-manufacturing-industry-drove-company-income-tax-in-q1/">more stable</a>.</p>
<h2>Gaps</h2>
<p>Nigeria is having to borrow because of two key weaknesses – neither of which are addressed in the budget.</p>
<p>The first is the country’s lingering “dual-gap” economic problem. This refers to a situation in which domestic savings aren’t adequate to fund a country’s desired level of capital investment – the saving-investment gap. </p>
<p>In addition, the country doesn’t generate enough foreign exchange earnings to pay for its imports – the foreign exchange gap. It’s difficult to estimate the magnitude of the foreign exchange gap in Nigeria. But it’s manifested by the fact that foreign airlines in the country have been unable to repatriate about <a href="https://www.icirnigeria.org/trapped-funds-why-airlines-cant-repatriate-money-out-of-nigeria/">$450 million</a> in ticket sales because of acute shortages of foreign exchange. </p>
<p>Nigeria isn’t generating enough foreign exchange earnings to meet the economy’s requirements. This has led to a parallel market in foreign exchange, with most businesses and individuals turning to the parallel market to source major foreign currencies such as the US dollar.</p>
<p>The 2023 budget is based on an exchange of rate of 435.57 naira to US$1, compared to over <a href="https://www.thecable.ng/naira-hits-n742-at-parallel-market-as-fx-scarcity-bites-harder">700 naira</a> at the parallel market. Buhari made no mention of government intention to close this <a href="https://www.premiumtimesng.com/news/headlines/556088-nigerias-forex-crisis-deepens-as-gap-between-nairas-official-black-rates-widest-in-six-years.html">huge gap</a> between the official exchange rate and the parallel market rate. </p>
<p>The only sustainable way to close this gap is to raise the capacity of the economy to generate foreign exchange earnings.</p>
<p>The gap has serious implications for government expenditure outcomes. Many of the ministries, departments and agencies of government buy goods and services from companies that source their foreign exchange requirements from the parallel market. </p>
<p>This automatically makes expenditure estimates in the 2023 budget unrealistic, as the suppliers of goods and services will require a revision to their contracts to cover the higher costs of sourcing foreign exchange. This would then require supplemental budgets and additional borrowings, which in turn, make expenditure projections unreliable. </p>
<h2>Lingering fears</h2>
<p>The first and second quarters of 2023 will be dominated by <a href="https://inecnigeria.org/wp-content/uploads/2022/09/TIMETABLE-FOR-2023-GENERAL-ELECTION.pdf">elections</a> and political transitions. This may have the effect of disrupting economic activities and fuelling uncertainties, especially among domestic and foreign investors. </p>
<p>The economy may therefore fall short of the 3.5% growth rate assumed in the budget parameters, which would subsequently result in lower revenues and additional borrowings.</p>
<p>Nigeria’s overall <a href="https://tradingeconomics.com/nigeria/government-debt-to-gdp">debt to GDP ratio</a> of about 37% is <a href="https://theconversation.com/nigerias-debt-is-sustainable-but-dangers-loom-on-the-horizon-166372">sustainable</a>. However, the new round of budgeted borrowing sends the wrong signal to domestic and foreign investors. </p>
<p>Deficits and debts imply that taxes will be raised in the future to pay for debts, making investments less profitable. It may also prompt nervous investors to move their capital to more fiscally stable countries.</p>
<p>There are also fears that unrestrained borrowing could tilt the country’s debt portfolio into the realm of unsustainability, which may then lead to defaults in debt repayments and a steep decline in new loans. Government obligations to contractors and other investors would be jeopardised. </p>
<p>The lip service paid by the 2023 budget to structural transformation and sustained economic development will dampen investors’ optimism about the Nigerian economy. The lack of clarity about the future direction of the economy under a new administration, as well as the lingering security challenges in the country, will make matters even worse.</p><img src="https://counter.theconversation.com/content/192659/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Stephen Onyeiwu does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Nigeria’s 2023 budget could worsen the country’s cycle of deficits and debts.Stephen Onyeiwu, Professor of Economics & Business, Allegheny CollegeLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1890222022-08-29T13:11:54Z2022-08-29T13:11:54ZNigeria’s economy: four priorities president-elect Bola Tinubu must deliver on<figure><img src="https://images.theconversation.com/files/480085/original/file-20220819-16-ccggoi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">New train services like this, in Lagos, are designed to boost economic activities and ease movement of passengers. </span> <span class="attribution"><span class="source">Pius Utomi Ekpei/AFP via Getty Images</span></span></figcaption></figure><p><a href="https://theconversation.com/bola-tinubu-the-kingmaker-is-now-nigerias-president-elect-200383">Bola Tinubu</a>, the winner of Nigeria’s keenly contested presidential election, will have a daunting task fixing a near comatose economy. </p>
<p>His administration will encounter monumental economic, security and political challenges. They will be greeted by a distraught populace bedevilled by <a href="https://www.dataphyte.com/latest-reports/number-of-poor-persons-in-nigeria-to-rise-to-95-1-million-in-2022/">rising poverty</a>, inflation, unemployment and unprecedented levels of insecurity. </p>
<p>The <a href="https://theconversation.com/nigerias-poverty-profile-is-grim-its-time-to-move-beyond-handouts-163302">high poverty</a> and <a href="https://theconversation.com/a-third-of-nigerians-are-unemployed-heres-why-159262">unemployment rates</a> in Nigeria are ticking time bombs. </p>
<p>To avoid the kind of <a href="https://www.theguardian.com/world/2022/jul/09/sri-lanka-protests-thousands-storm-presidents-residence-colombo">violent protests</a> that forced the president of Sri Lanka to step down, as well as those that rocked <a href="https://www.nytimes.com/2022/08/12/world/africa/sierra-leone-protests.html">Sierra Leone</a> recently, the new president will need to take bold and decisive measures. </p>
<p>Nigeria’s 33.3% unemployment (42.5% for the youth) and 22.3% underemployment rates are an urgent issue, coupled with a <a href="https://www.nigerianstat.gov.ng/">20% inflation rate</a>. The latter is caused mainly by increases in food prices. Insecurity has forced many farmers to abandon their farms and disrupted food supplies to urban centres. The cost of living in Nigeria is <a href="https://theconversation.com/nigerian-workers-struggle-as-cost-of-living-outstrips-incomes-182069">so high</a> that Nigerians devote <a href="https://www.weforum.org/agenda/2016/12/this-map-shows-how-much-each-country-spends-on-food/">over half</a> of their income to food alone. </p>
<p>About four in ten Nigerians live below the <a href="https://www.worldbank.org/en/news/press-release/2022/03/21/afw-deep-structural-reforms-guided-by-evidence-are-urgently-needed-to-lift-millions-of-nigerians-out-of-poverty">national poverty line</a>. Only <a href="https://www.worldbank.org/en/news/press-release/2022/03/21/afw-deep-structural-reforms-guided-by-evidence-are-urgently-needed-to-lift-millions-of-nigerians-out-of-poverty">17%</a> hold jobs that pay enough to get out of poverty.</p>
<p>Amid these economic challenges, Nigerians feel a deep <a href="https://guardian.ng/opinion/why-nigerians-are-angry/">sense of deprivation</a> when they see a few elites, with privileged access to the national wealth, live ostentatiously. </p>
<p>Given all these problems, and based on my <a href="https://theconversation.com/what-buhari-has-to-do-to-take-nigerias-economy-to-the-next-level-113046">previous research</a>, I propose that a plan for economic revitalisation should be Tinubu’s first focus. </p>
<p>The plan should contain measurable targets for creating jobs, reducing poverty and decreasing the cost of living, improving security and making space for a more collaborative approach. This should involve the private sector and other players.</p>
<h2>1. Create jobs</h2>
<p>Massive job creation should be done through labour-intensive “shovel-ready” projects in construction, agriculture, renewable energy, environmental sanitation and security. </p>
<p>The new head of state should resist pressures by politicians to include self-serving projects that don’t create jobs or strengthen the economy’s productive capacities.</p>
<p>Former US president Barack Obama showed how massive fiscal stimulus programmes that include job-creating projects can be effective in reducing unemployment and revitalising a depressed economy. </p>
<p>Nigeria’s <a href="https://theconversation.com/nigerias-debt-is-sustainable-but-dangers-loom-on-the-horizon-166372">unsustainable</a> debt profile means Tinubu won’t have much space for an expansionary fiscal policy. About 65% of government revenue and over 90% of <a href="https://www.cfr.org/blog/amid-oil-price-collapse-nigeria-running-out-foreign-exchange">foreign exchange earnings</a> come from the oil sector. Uncertainties in the global oil market and sluggish revenue growth, as well as the negative impacts of COVID-19 on the economy, imply that the country will face challenges generating enough revenue to service debt and finance <a href="https://nairametrics.com/2022/05/05/nigeria-spends-96-of-its-revenue-on-debt-servicing-in-2021-worst-on-record/">budget deficits</a>.</p>
<p>But Nigeria can reduce government profligacy and rein in corruption. Fiscal challenges can also be addressed by imposing taxes on major corporations, especially those in lucrative sectors like oil and gas, telecommunications and banking. </p>
<h2>2. Reduce poverty and cut the cost of living</h2>
<p>The new administration will have to provide immediate succour to millions living in misery, destitution and hunger. </p>
<p>The Muhammadu Buhari administration experimented with conditional cash transfers. But school meals and other <a href="https://statehouse.gov.ng/policy/economy/national-social-investment-programme/">social interventional programmes</a> have only reached <a href="https://www.thisdaylive.com/index.php/2022/01/27/eradicating-poverty-with-social-investment-programme/">10 million</a> people – 5% of the population.</p>
<p>Nigeria is one of the very few resource-rich countries with no means-tested and institutionalised safety net programmes. </p>
<p>The new president should learn from India, where the government introduced <a href="https://www.bankbazaar.com/ration-card/types-of-ration-card.html">ration cards</a>. These enable poor Indians to obtain basic food items at subsidised prices. </p>
<p>Food affordability increases productivity, fosters good health, spurs demand for agricultural products and boosts economic growth. It also prevents violent protests and crime. </p>
<p>Tinubu should eliminate Nigeria’s very expensive and corruption-ridden <a href="https://theconversation.com/fuel-subsidies-in-nigeria-theyre-bad-for-the-economy-but-the-lifeblood-of-politicians-170966">fuel subsidies</a>, to create a better environment for job-creating projects.</p>
<h2>3. Reduce insecurity</h2>
<p>Nigeria’s economic problems can’t be addressed in an environment of <a href="https://theconversation.com/nigerias-spiralling-insecurity-five-essential-reads-186696">insecurity</a>. There are many causes for this insecurity, but the biggest is inadequate resources. </p>
<p>Stories have been told about how criminals overwhelm military and police posts because of inadequate manpower and equipment there. The number of security personnel should be increased massively, through recruiting new officers and withdrawing others from non-essential services.</p>
<h2>4. Collaborative approach</h2>
<p>The government cannot do it all. Tinubu should create a conducive environment for the private sector to thrive. Domestic and foreign investors need incentives to invest in the economy. </p>
<p>They need a stable macroeconomic environment with low inflation, a stable exchange rate and robust economic growth. </p>
<p>To this end, the president should be very careful about the choice of his <a href="https://punchng.com/buharis-economic-management-team/">economic management team</a>. The choice of advisors shouldn’t be dictated by ethnic, political and other extraneous criteria. </p>
<p>It is widely believed that Nigerians have never been as polarised. Across the country there are embers of religious intolerance, ethnic chauvinism, separatist tendencies and <a href="https://bti-project.org/en/reports/country-report/NGA">intra-class</a> clashes.</p>
<p>The new president should provide a credible platform for Nigerians to have frank conversations about how to resolve these issues, as well as the future political structure of the country. </p>
<h2>Practical steps</h2>
<p>Tinubu should rejig the <a href="https://www.efcc.gov.ng/">Economic and Financial Crimes Commission</a> and the <a href="https://icpc.gov.ng/">Independent Corrupt Practices Commission</a> to make them more effective in fighting corruption. </p>
<p>Nigerians want to see more corrupt individuals prosecuted and jailed. They want to move beyond mere naming and shaming. </p>
<p>To signal urgency, the new president should announce his cabinet and economic team before their inauguration. </p>
<p>This would enable them to hit the ground running. Ministerial portfolios should be assigned before ministers are screened by the senate. This will enable their eligibility to be assessed during their confirmation hearings.</p><img src="https://counter.theconversation.com/content/189022/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Stephen Onyeiwu does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Bola Tinubu will be saddled with a near comatose economy. Here are four priorities that would make the difference.Stephen Onyeiwu, Professor of Economics & Business, Allegheny CollegeLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1793102022-03-28T19:15:49Z2022-03-28T19:15:49ZThis budget, amid talk of deficits, consider the lessons we ought to have learned<p>A decade ago, and years before Treasurer Josh Frydenberg promised a budget that was “<a href="https://joshfrydenberg.com.au/latest-news/2019-budget-speech/">back in the black</a>”, Prime Minister Julia Gillard promised the same thing.</p>
<p>At that time, in the lead-up to the 2012 budget, unemployment was higher than it is today, and inflation and wages growth were so low (1.6% and 2.3%, respectively) as to provide no impediment whatsoever to cutting unemployment further.</p>
<p>Yet Gillard was resolute in her determination to bring in a budget surplus, by which she meant a budget that spent less than it took in.</p>
<p>She titled her speech to Western Australia’s Chamber Of Commerce and Industry and Chamber Of Minerals And Energy “<a href="https://cdn.theconversation.com/static_files/files/2054/In_the_Black_Prime_Minister_Julia_Gillard_address_to_Chamber_of_Minerals_and_Energy_of_Western_Australia_April_19_2012.pdf">In the Black</a>”</p>
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<a href="https://images.theconversation.com/files/454631/original/file-20220328-17-18rac6p.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/454631/original/file-20220328-17-18rac6p.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/454631/original/file-20220328-17-18rac6p.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=354&fit=crop&dpr=1 600w, https://images.theconversation.com/files/454631/original/file-20220328-17-18rac6p.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=354&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/454631/original/file-20220328-17-18rac6p.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=354&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/454631/original/file-20220328-17-18rac6p.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=445&fit=crop&dpr=1 754w, https://images.theconversation.com/files/454631/original/file-20220328-17-18rac6p.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=445&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/454631/original/file-20220328-17-18rac6p.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=445&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="source" href="https://cdn.theconversation.com/static_files/files/2054/In_the_Black_Prime_Minister_Julia_Gillard_address_to_Chamber_of_Minerals_and_Energy_of_Western_Australia_April_19_2012.pdf">In the Black, Prime Minister Julia Gillard, April 19 2012.</a></span>
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<p>There was “no clearer sign of a strong economy than a surplus”. </p>
<p>It would “protect jobs”, provide a “buffer in case the global economy gets worse”, and allow the Reserve Bank to cut rates, “knowing that an interest rate reduction is good for families and business”. </p>
<p>Indeed, she added:</p>
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<p>…let me make this clear once and for all: a budget surplus is not a political target but a potent economic tool.</p>
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<p>I sometimes wonder whether she remembers this claim. I nearly asked her once, crossing North Terrace in Adelaide, but I chickened out.</p>
<h2>As with Gillard, so with Abbott</h2>
<p>Gillard never did get her budget surplus, and she and Kevin Rudd were followed as prime minister by Tony Abbott, who talked of a “<a href="https://www.abc.net.au/news/2013-09-07/tony-abbott-claims-election-victory/4943606?nw=0&r=HtmlFragment">budget emergency</a>” that only a run of surpluses could fix.</p>
<p>While in opposition, his finance spokesman Barnaby Joyce had gone as far as to suggest that the debt run up by years of budget deficits (spending more than the government took in) was “<a href="https://www.abc.net.au/news/2010-02-09/australia-close-to-defaulting-on-debts-joyce/325254">getting to a point where we can’t repay it</a>”.</p>
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Read more:
<a href="https://theconversation.com/please-no-more-questions-about-how-to-pay-off-the-covid-debt-158056">Please, no more questions about how to pay off the COVID debt</a>
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<p>That was too much even for Abbott, who <a href="https://www.smh.com.au/national/abbott-dumps-joyce-from-finance-in-frontbench-reshuffle-20100325-qzqa.html">dumped</a> Joyce as finance spokesman a month later.</p>
<p>Neither Abbott nor his successors Malcolm Turnbull and Scott Morrison ever did get a surplus, although Morrison came close in 2018-19.</p>
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<p>The deficits and the way they were financed meant net debt continued to rise and rise. But the government didn’t run out of cash. </p>
<p>And when the pandemic struck, borrowing (and having the Reserve Bank create) hundred of billions to support businesses and their employees turned out not to be a problem.</p>
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<p>So why did Gillard, Abbott, Turnbull, and for a while Morrison and Frydenberg, have their hearts so set on ultimately unachievable surpluses?</p>
<p>It might be because they didn’t understand how Australia’s money system works. More charitably, it might be because, while they did understand how Australia’s system works, they found it convenient not to pass that knowledge on.</p>
<p>They have been perpetuating the “government as households” metaphor, which ignores the role of the government as a currency issuer as well as a currency user.</p>
<p>In cooperation with its wholly owned central bank, Australia’s government produces Australian dollars. It can’t run out of them.</p>
<h2>Budget money can’t run out</h2>
<p>The government has good reasons for collecting taxes (to suppress spending that might accelerate inflation) and good reasons for borrowing by issuing bonds (to temporarily withdraw money from the economy). But these don’t include a need to fund its spending.</p>
<p>In truth, every dollar the government spends is a new dollar; every dollar it collects in taxes is a dollar destroyed.</p>
<p>Every bond it sells does nothing more than change dollars into transferable savings accounts at the Reserve Bank.</p>
<p><a href="https://www.stlouisfed.org/publications/regional-economist/fourth-quarter-2020/does-national-debt-matter">David Andolfatto</a>, an economist who is vice president of the US Federal Reserve Bank of St Louis, puts it this way: </p>
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<p>…it seems more accurate to view the national debt less as form of debt, and more as a form of money in circulation.</p>
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<p>What this means is that Gillard was nearly right. She just needed to dump the word “surplus”. </p>
<p>The budget is indeed a potent economic tool. Too much spending without offsetting tax will indeed push up inflation. Not enough spending will keep people out of work and risk a recession.</p>
<p>But how much spending is needed relative to tax depends on the economy.</p>
<p>In 2020 and 2021 a willingness to push out much more money than was taken in supported an economy that would otherwise have crashed, and helped bring about two of the most rapid recoveries from recessions and downturns in history.</p>
<h2>Horses for courses</h2>
<p>What budgets should do depends on how things are, and if we haven’t learned this by now, we should have.</p>
<p>And what else have we learned? That complex global supply chains can be efficient but not necessarily resilient. </p>
<p>Which means a transition away from petrol towards renewables may have benefits beyond the purely environmental. That preventative health, health care and aged care are more important than we might have thought.</p>
<p>We have have also learned about the <a href="https://thenewdaily.com.au/finance/2022/02/11/michael-pascoe-rba-economy/">limits</a> to the powers of the Reserve Bank.</p>
<p>While governments talked of surpluses, we continued to obsess about central banks using official interest rates to control inflation. When it tried to push up inflation, it couldn’t, until recently.</p>
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<p>It might be that just as interest rate cuts were not the best way to stimulate inflation before the pandemic, interest rate hikes are not the best way to suppress inflation afterwards. </p>
<p>Higher interest rates impose costs on businesses. </p>
<p>And they actually increase some incomes, including those of savers and high earners who own products linked to treasury bonds. </p>
<p>When high interest rates can suppress inflation, they are likely to do it by triggering a slide in asset prices, including the price of housing assets, which, with household debt high, ought to give policy-makers pause for thought.</p>
<p>Taxing more and reining in government spending might do it better.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/memories-in-1961-labor-promised-to-boost-the-deficit-to-fight-unemployment-the-promise-won-115376">Memories. In 1961 Labor promised to boost the deficit to fight unemployment. The promise won</a>
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<p>In any event, withdrawing money from the economy might not be the right thing to do at a time when when high prices are being driven by global events rather than spending at home.</p>
<p>There’s a lot we should have learned in the past decade, much of it set out in <a href="https://theconversation.com/explainer-what-is-modern-monetary-theory-72095">modern monetary theory</a> – something the budget papers are likely to acknowledge quietly, if at all.</p><img src="https://counter.theconversation.com/content/179310/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Steven Hail does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Whether a budget should be in surplus or deficit depends on the circumstances of the time. Gillard didn’t recognise it, Abbott didn’t recognise it. At last the message is getting through.Steven Hail, Adjunct Associate Professor, Torrens University AustraliaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1733722021-12-16T13:29:15Z2021-12-16T13:29:15ZWhy spending $2 trillion on child care, health care and fighting climate change won’t make inflation any worse than it already is<figure><img src="https://images.theconversation.com/files/437849/original/file-20211215-15-16p8jap.jpg?ixlib=rb-1.1.0&rect=54%2C54%2C5137%2C3394&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">You get the metaphor. </span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/dripping-sap-royalty-free-image/496074811?adppopup=true">Edwin Remsberg/The Image Bank via Getty Images</a></span></figcaption></figure><p><a href="https://www.bloomberg.com/news/articles/2021-11-17/top-economists-see-biden-s-spending-plan-adding-to-inflation">One of the main concerns</a> raised by critics of President Joe Biden’s Build Back Better plan is that <a href="https://www.businessinsider.com/build-back-better-lift-inflation-higher-joe-manchin-price-growth-2021-12">it will drive up inflation</a>, which <a href="https://theconversation.com/why-is-inflation-so-high-is-it-bad-an-economist-answers-3-questions-about-soaring-consumer-prices-173572">is already running at the fastest pace in four decades</a>. </p>
<p>The Senate is currently considering a <a href="https://apnews.com/article/climate-immigration-joe-biden-health-lifestyle-bff841da156cb12cd47a564f9e0267eb">roughly US$2 trillion bill</a> <a href="https://www.congress.gov/bill/117th-congress/house-bill/5376">passed by the House</a> that would spend money on health care, education, fighting climate change and much else over the next decade. But Republicans and a handful of Democrats like Sen. Joe Manchin of West Virginia argue the risk that <a href="https://www.marketwatch.com/story/manchin-says-inflation-unknown-is-bigger-problem-than-the-need-for-bidens-build-back-better-plan-11638918421">more spending could push inflation even higher is too great</a>. </p>
<p>As <a href="https://scholar.google.com/citations?user=rlbLcnEAAAAJ&hl=en&oi=ao">an economist</a>, I believe these concerns are likely overblown. Here’s why. </p>
<h2>Putting $2 trillion in context</h2>
<p>High inflation <a href="https://econofact.org/rising-inflation">is clearly a problem at the moment</a> – as the Federal Reserve’s Dec. 15, 2021, <a href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20211215a.htm">decision to accelerate its withdrawal</a> of economic stimulus signals. </p>
<p>The most recent statistics show inflation, as measured by the annual increase in the Consumer Price Index, <a href="https://www.bls.gov/news.release/cpi.nr0.htm">was 6.8% in November 2021</a>. This is the highest level since 1982 – yet still a long way from the double-digit inflation experienced back then. </p>
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<p>The question, then, is: Could an additional large spending increase cause inflation to accelerate further? </p>
<p>To answer this, it’s useful to put the numbers in some context. </p>
<p>The price tag of the Build Back Better plan passed by the House of Representatives <a href="https://apnews.com/article/climate-joe-biden-business-health-congress-44c43fab00aa95a268a2cba420713d22">is about $2 trillion</a>, to be spent over a 10-year period. If the spending is spread out evenly, that would amount to about $200 billion a year. That’s only about 3% of <a href="https://datalab.usaspending.gov/americas-finance-guide/spending/">how much the government planned to spend in 2021</a>. </p>
<p>Another comparison is to the <a href="https://www.investopedia.com/terms/g/gdp.asp">gross domestic product</a>, which is the value of all goods and services produced in a country. U.S. GDP is <a href="https://www.bloomberg.com/news/articles/2021-12-04/goldman-cuts-u-s-gdp-forecast-saying-omicron-is-drag-on-growth">projected to be</a> $22.3 trillion in 2022. This means that the first year of the bill’s spending would be about 0.8% of the GDP.</p>
<p>While that doesn’t sound like much either, it’s not insignificant. Goldman Sachs <a href="https://www.bloomberg.com/news/articles/2021-12-04/goldman-cuts-u-s-gdp-forecast-saying-omicron-is-drag-on-growth">estimates U.S. economic growth at 3.8%</a> in 2022. If the increased spending translated into economic activity on a dollar-for-dollar basis, that could lift growth by over one-fifth.</p>
<p>[<em>More than 140,000 readers get one of The Conversation’s informative newsletters.</em> <a href="https://memberservices.theconversation.com/newsletters/?source=inline-140K">Join the list today</a>.]</p>
<p>But what really matters here is how much the bill would spend in excess of any taxes raised to pay for the program. The <a href="https://taxfoundation.org/build-back-better-plan-reconciliation-bill-tax/">higher taxes on the wealthy and corporations that the House version of the bill calls</a> for would reduce economic activity – by taking money out of the economy – offsetting some of the impact of the spending that would stimulate it. </p>
<p>The <a href="https://www.cbo.gov/publication/57619">Congressional Budget Office estimates</a> that the bill would increase the deficit by $150.7 billion over a decade, or about $15 billion a year. Again assuming this is spread evenly over the 10 years, it would amount to less than one-tenth of 1% of GDP. </p>
<p>In other words, even if the proposed spending has an <a href="https://www.stlouisfed.org/on-the-economy/2017/december/government-spending-stimulate-economy">unusually large impact on the economy</a>, it would still be barely noticeable on a macro level. </p>
<h2>But it won’t reduce inflation either</h2>
<p>Some proponents of the bill – <a href="https://www.whitehouse.gov/briefing-room/press-briefings/2021/11/15/press-briefing-by-press-secretary-jen-psaki-november-15-2021/">including the White House</a> and <a href="https://www.newsweek.com/56-economists-tout-benefits-bidens-build-back-better-act-despite-gop-inflation-concerns-1658224">some economists</a> – have gone further. They have argued that the proposed spending package would actually reduce inflation by increasing the productive capacity of the economy – or its maximum potential output.</p>
<p>This seems implausible to me, at least given the current level of inflation. Historical evidence shows <a href="https://www.stlouisfed.org/publications/regional-economist/january-1998/a-brave-new-economic-world-the-productivity-puzzle#5##5">a more productive economy can grow more quickly</a> with relatively little upward pressure on prices. <a href="https://www.federalreserve.gov/boarddocs/speeches/1997/199710142.htm">That’s what happened in the U.S. in the 1990s</a>, when the economy grew strongly with little inflation. </p>
<p>In addition, it takes time for investments like those in the bill to translate into gains in productivity and economic growth – meaning many of these impacts will be slow to materialize. </p>
<p>Current inflation is likely an acute problem <a href="https://theconversation.com/why-are-prices-so-high-blame-the-supply-chain-and-thats-the-reason-inflation-is-here-to-stay-169441">reflecting supply chain disruptions</a> and pent-up demand, challenges that won’t be resolved by expanding the economy’s productive capacity five or more years down the road. But again, neither would inflation likely get any worse by spending $2 trillion to <a href="https://www.nytimes.com/article/build-back-better-explained.html">improve access to</a> affordable child care, fight climate change and increase health care coverage. </p>
<p>Whatever the arguments for or against passage of the bill, I don’t believe its potential impact on inflation should be one of them.</p><img src="https://counter.theconversation.com/content/173372/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael Klein receives funding from the Peter G. Peterson Foundation, the Alfred P. Sloan Foundation, the Smith Richardson Foundation and the Calvin G. Kazanjian Foundation.</span></em></p>Republicans and a few Democrats say the Build Back Better plan would increase the already fast pace of inflation.Michael Klein, Professor of International Economic Affairs at The Fletcher School, Tufts UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1729822021-12-05T07:19:28Z2021-12-05T07:19:28ZNigeria’s transport grant isn’t the best way to allocate fuel subsidy savings: here’s what is<figure><img src="https://images.theconversation.com/files/435050/original/file-20211201-15-125022s.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Protestors march in Lagos during a demonstration against fuel subsidy removal in 2012. </span> <span class="attribution"><span class="source">Pius Utomi Ekpei/AFP via Getty Image</span></span></figcaption></figure><p>Following <a href="https://www.imf.org/en/News/Articles/2021/11/19/nigeria-staff-concluding-statement-of-the-2021-article-iv-mission">unrelenting pressure</a> by the International Monetary Fund (IMF) and World Bank, the Nigerian government intends to eliminate its fuel subsidy in July 2022. </p>
<p>Nigeria spent about <a href="https://www.reuters.com/article/us-nigeria-oil-gasoline/nigeria-pays-14-million-for-fuel-in-june-despite-subsidy-removal-nnpc-idUSKBN25R1DO">N10 trillion</a> (currently US$24.5 billion) on petroleum subsidies between 2006 and 2018. About <a href="https://www.bloomberg.com/news/articles/2021-03-01/nigeria-s-nnpc-won-t-increase-fuel-prices-in-march">$2.5 billion</a> was spent on fuel subsidies in 2020. It is expected that the subsidy will have cost <a href="https://www.bloombergquint.com/markets/nigeria-s-annual-spending-on-subsidy-could-exceed-eurobond-raise">$3 billion</a> in 2021. </p>
<p>In lieu of the subsidy, government says, <a href="https://www.reuters.com/article/nigeria-economy-idAFL1N2SE0TB">40 million</a> poor Nigerians will receive a “transport grant” of N5,000 ($12) per month. This will amount to about N2.4 trillion ($5.8 billion) per year. </p>
<p>These figures imply that the expected savings from ending the subsidy can only cover about half of the cost of the proposed transport grant. In an era where the government has been grappling with huge budget deficits and spiralling <a href="https://theconversation.com/nigerias-debt-is-sustainable-but-dangers-loom-on-the-horizon-166372">debt</a>, it’s unclear how the other half will be paid for. </p>
<p>In the public space, there are <a href="https://guardian.ng/opinion/the-world-banks-bad-news-about-our-economy/">views</a> that the removal of the fuel subsidy in Nigeria is long overdue, and that vested interests and political expediency have prevented this from happening sooner. </p>
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Read more:
<a href="https://theconversation.com/fuel-subsidies-in-nigeria-theyre-bad-for-the-economy-but-the-lifeblood-of-politicians-170966">Fuel subsidies in Nigeria: they're bad for the economy, but the lifeblood of politicians</a>
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<p>The clamour for subsidy removal stems from the <a href="https://www.thecable.ng/rich-nigerians-benefitting-from-petrol-subsidy-not-the-poor-says-minister">argument</a> that it is inequitable and favours affluent Nigerians who use a disproportionate amount of fuel. </p>
<p>It is often argued that the fuel subsidy diverts almost <a href="https://www.bloombergquint.com/markets/nigeria-s-annual-spending-on-subsidy-could-exceed-eurobond-raise">$3 billion per year</a> that could have been invested in areas such as health, education and infrastructure that enhance the productive capacities of the poor. </p>
<p>Apart from equity issues, much has been written about how the fuel subsidy has bred <a href="https://www.reuters.com/article/us-nigeria-fuel-scam/nigeria-investigates-4-billion-fuel-subsidy-fraud-idUSTRE80I1R220120119">corruption</a> and added to the ever-increasing budget <a href="https://www.reuters.com/world/africa/nigeria-unveils-record-398-bln-budget-2022-spending-up-25-2021-10-07/">deficits</a> in Nigeria. </p>
<p>But the government’s plan to replace the subsidy with a transport grant is not the best approach for using fuel subsidy savings. My calculations of the cost of the grant suggest that it is unsustainable.</p>
<h2>Devil in the details</h2>
<p>Removing the subsidy will surely increase the price of petrol in Nigeria, which will cause transport fares to rise. </p>
<p>The extent of these increases is uncertain, which raises the question of why the government chose N5,000 as the optimum amount that would supposedly cushion the effects of price increases. </p>
<p>Then there’s the question of who will get the grant. According to the World Bank, <a href="https://blogs.worldbank.org/opendata/tackling-poverty-multiple-dimensions-proving-ground-nigeria">47.3% of Nigerians</a>, or 98 million people, live in multidimensional poverty. If the transport grant is only for 40 million, then it will reach fewer than half of poor Nigerians. </p>
<p>It is unclear what criteria will be used to determine which Nigerians will receive the grant. There is therefore the risk that those who need the grant the most may not receive it.</p>
<p>Means-testing as a tool for determining eligibility for safety nets in Nigeria is very difficult. In the absence of a means-testing mechanism, the <a href="https://nassp.gov.ng/about-us/">National Social Safety-Net Coordinating Office</a> in 2016 began to compile a national social register of poor Nigerians. About <a href="https://www.vanguardngr.com/2021/03/30m-nigerians-in-national-social-register-%E2%80%95-fg/">30 million</a> have so far been captured in the register. </p>
<p>Paying a grant in an environment where information on income, assets, bank accounts and identity cards is sparse could create opportunities for corruption, cronyism and nepotism. </p>
<p>The government has announced that the grant will last for one year, in the first instance. This may be interpreted as a political stunt with government hoping that Nigerians will forget the subsidy removal later.</p>
<p>The first year of the grant will end at the same time as the President Muhammadu Buhari administration does in 2023. So it may be that this administration is trying to shield itself from the backlash from fuel subsidy removal, while passing the buck to the next administration. </p>
<p>Poor Nigerians will be hurt if the price of petrol increases significantly, without making the transport grant permanent. A transport grant may have the effect of inducing transporters to raise fares, at a rate that might wipe out the gains from the grant. </p>
<p>In other words, many Nigerians will face a double whammy of increases in fuel price and a rise in transport fares.</p>
<h2>What to do</h2>
<p>Based on the fact that the transport grant is unsustainable, and also the difficulty of determining which Nigerians should be eligible for the grant, a better strategy for cushioning the effects of fuel subsidy removal is massive investment in public transportation. </p>
<p>The price of a 56-passenger 2019 luxury bus is about <a href="https://nwbus.com/coach-buses-for-sale/">$400,000</a>. So the $3 billion in 2021 fuel subsidies would have purchased 7,500 buses, or about 200 buses for each of the country’s 36 states. This strategy would have more of an impact and be more inclusive than a transport grant that most Nigerians will not receive. </p>
<p>Each state should be encouraged to establish an intra-state transportation agency. The federal government should have a similar agency for inter-state travel. Part of the savings from subsidy removal should be allocated to the state and federal transportation agencies. </p>
<p>They could purchase buses with the fund and cover administrative costs of providing subsidised transport to workers (both formal and informal), farmers, students and other indigent Nigerians. </p>
<p>Using the fuel subsidy savings to support a network of subsidised public transportation in urban and rural areas would boost Nigeria’s productive capacity in various ways. </p>
<p>It would reduce food inflation, as farmers would be able to transport their products to the market more easily and at a lower cost. This would encourage them to produce more and drive down food prices. </p>
<p>Nigeria should learn from the <a href="https://guardian.ng/opinion/is-nigeria-heading-for-food-riots/">Indian experience</a>, where public transportation subsidies have boosted food supply and lowered food prices.</p>
<p>Nigeria should prioritise investments that raise the economy’s productive capacities, rather than focusing on increasing consumption. Recipients of the transport grant may spend the money on non-durable consumer goods, which could drive inflation, already about <a href="https://www.statista.com/statistics/383132/inflation-rate-in-nigeria/">16%</a>. These goods are most likely to be imported, which would strain the country’s <a href="https://www.cfr.org/blog/amid-oil-price-collapse-nigeria-running-out-foreign-exchange">scarce</a> foreign exchange. </p>
<p>The provision of subsidised public transport would be good for workers, as it would enable them to spend more on things that increase their productive capacities and contribute to Nigeria’s gross domestic product (GDP). </p>
<p>Nigerian students at all levels of education would benefit from the investment in public transport. Most of them do not receive direct financial support from the government, but subsidising transport would indirectly subsidise their education. </p>
<p>The government would be pacifying students and workers, who are usually the <a href="https://www.thisdaylive.com/index.php/2019/04/14/nlc-warns-against-removal-of-fuel-subsidy/">most vociferous</a> in opposing subsidy removal. Previous administrations in Nigeria have jettisoned plans to remove the fuel subsidy, following <a href="https://www.vanguardngr.com/2012/04/fg-abandons-100-subsidy-removal/">massive</a> and violent protests against those attempts.</p><img src="https://counter.theconversation.com/content/172982/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Stephen Onyeiwu does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Removal of the fuel subsidy in Nigeria is long overdue, but replacing it with a transport grant is not the best approach.Stephen Onyeiwu, Andrew Wells Robertson Professor of Economics, Allegheny CollegeLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1685032021-09-23T14:00:41Z2021-09-23T14:00:41ZMerkel’s caution has made Germany the great economic underachiever of our times<figure><img src="https://images.theconversation.com/files/422910/original/file-20210923-25-q7r047.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Angela Merkel 2015 portrait by Colin Davidson.</span> <span class="attribution"><a class="source" href="https://www.alamy.com/stock-photo-london-uk-19th-jan-2016-painting-titled-portrait-of-angela-merkel-93403007.html?pv=1&stamp=2&imageid=92028807-03E2-47D8-9032-3A49EFA77E62&p=280223&n=0&orientation=0&pn=1&searchtype=0&IsFromSearch=1&srch=foo%3dbar%26st%3d0%26pn%3d1%26ps%3d100%26sortby%3d2%26resultview%3dsortbyPopular%26npgs%3d0%26qt%3dangela%2520merkel%26qt_raw%3dangela%2520merkel%26lic%3d3%26mr%3d0%26pr%3d0%26ot%3d0%26creative%3d%26ag%3d0%26hc%3d0%26pc%3d%26blackwhite%3d%26cutout%3d%26tbar%3d1%26et%3d0x000000000000000000000%26vp%3d0%26loc%3d0%26imgt%3d0%26dtfr%3d%26dtto%3d%26size%3d0xFF%26archive%3d1%26groupid%3d%26pseudoid%3d29263%26a%3d%26cdid%3d%26cdsrt%3d%26name%3d%26qn%3d%26apalib%3d%26apalic%3d%26lightbox%3d%26gname%3d%26gtype%3d%26xstx%3d0%26simid%3d%26saveQry%3d%26editorial%3d%26nu%3d%26t%3d%26edoptin%3d%26customgeoip%3dGB%26cap%3d1%26cbstore%3d1%26vd%3d0%26lb%3d%26fi%3d2%26edrf%3d%26ispremium%3d1%26flip%3d0%26pl%3d">Raymong Tang</a></span></figcaption></figure><p>Germans are taking to the polls on September 26 to elect the members for the 20th Bundestag. For the first time in 16 years, there will be a new chancellor as Angela Merkel steps down. Germany has been through some enormous challenges during her tenure, including the global financial crisis, European sovereign debt crisis and the COVID-19 pandemic, and many commentators have praised her <a href="https://theconversation.com/angela-merkel-gentle-persuasion-in-an-age-of-populism-167777">quiet efficiency</a>. </p>
<p><a href="https://www.politico.eu/europe-poll-of-polls/germany/">The polls</a> are predicting gains for the Social Democrats (SPD), who have been the junior coalition partner to Merkel’s Christian Democratic Union (CDU) since 2013, but no party is expected to achieve a landslide victory. The SPD’s Olaf Scholz is the most likely successor to Merkel. He is already finance minister and vice chancellor in the outgoing administration, so the German political landscape looks unlikely to change drastically. </p>
<p>Yet the Germans would arguably benefit from changing their approach to running the economy, because it has not fared brilliantly under Merkel – and this would apply regardless of how the election turns out. The chart below, which shows what has happened to key indicators like growth, inflation and unemployment during her tenure, shows a very mixed picture. </p>
<p><strong>Germany’s economy under Merkel</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/422610/original/file-20210922-27-5jpma9.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Chart showing Germany's economic performance under Merkel" src="https://images.theconversation.com/files/422610/original/file-20210922-27-5jpma9.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/422610/original/file-20210922-27-5jpma9.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=526&fit=crop&dpr=1 600w, https://images.theconversation.com/files/422610/original/file-20210922-27-5jpma9.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=526&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/422610/original/file-20210922-27-5jpma9.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=526&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/422610/original/file-20210922-27-5jpma9.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=661&fit=crop&dpr=1 754w, https://images.theconversation.com/files/422610/original/file-20210922-27-5jpma9.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=661&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/422610/original/file-20210922-27-5jpma9.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=661&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Notes: current account and budget surplus/deficit are both as % of GDP; unemployment is a % of working population; GDP growth and inflation are quarter on quarter; inflation is consumer price index.</span>
<span class="attribution"><span class="source">OECD, ECB, Bundesbank</span></span>
</figcaption>
</figure>
<p>On the one hand, the fact that prices have been so static and most people have been in work are signs of a well run economy. Yet GDP growth has been quite low – and surely lower than it could have been given that Germany has been running large trade surpluses and also either surpluses in the public finances or small deficits. In other words, Germany could have spent more to encourage consumption and investment. </p>
<p>But Germany is famous for its determination to always balance its books. Under Merkel (and previous chancellors) the nation locked itself into a <a href="https://www.economist.com/europe/2011/12/10/tie-your-hands-please">fiscal straitjacket</a> variously known as <em>schuldenbremse</em> (“the debt brake”), <em>schwarze null</em> (“black zero”) or the balanced budget rule. It all boils down to German federal and state governments not being allowed to run budget deficits. </p>
<p>At the same time, German households are the thriftiest in the G7, boasting the <a href="https://data.oecd.org/natincome/saving-rate.htm">highest savings rate</a>. German household spending has consistently declined, from 56.4% as a percentage of their disposable income in 2009 to 51.9% in 2019, and obviously, COVID-19 dragged it further down to 50.7% in 2020.</p>
<p><strong>GDP growth across G7, 2010-20</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/422907/original/file-20210923-15-13zn9i9.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Graph showing GDP growth by G7 nation" src="https://images.theconversation.com/files/422907/original/file-20210923-15-13zn9i9.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/422907/original/file-20210923-15-13zn9i9.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=291&fit=crop&dpr=1 600w, https://images.theconversation.com/files/422907/original/file-20210923-15-13zn9i9.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=291&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/422907/original/file-20210923-15-13zn9i9.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=291&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/422907/original/file-20210923-15-13zn9i9.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=365&fit=crop&dpr=1 754w, https://images.theconversation.com/files/422907/original/file-20210923-15-13zn9i9.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=365&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/422907/original/file-20210923-15-13zn9i9.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=365&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?end=2020&start=1971&view=chart">World Bank</a></span>
</figcaption>
</figure>
<p>Both public and private fixed investment in Germany has been <a href="https://www.bruegel.org/2018/06/understanding-the-lack-of-german-public-investment/">declining for decades</a> as a percentage of GDP, despite all the money generated by the huge trade surplus. Lack of investment has started to weigh on the German economy, as manifested in the poor growth numbers. </p>
<p>Germany was showing 0% growth in the final quarter of 2019 even before the COVID-19 nosedive. So despite Germany’s fiscal prudence and gigantic trade surplus, the period between the global financial crisis and COVID-19 cannot be seen as a success story. It has been a period of long-term stagnation.</p>
<h2>The pandemic era</h2>
<p>In the era before the pandemic, Germany’s large trade surplus was causing international ructions, with the <a href="https://www.ft.com/content/57f104d2-e742-11e6-893c-082c54a7f539">US branding</a> the Germans currency manipulators. Yet neither the surplus nor the stagnation vanished under Merkel. As usual, Germany’s fascination with fiscal prudence came out on top. </p>
<p>Germany’s great strength in exports has been somewhat immune to COVID. The country’s trade balance did deteriorate a bit in 2020 as international demand for German goods was affected by the pandemic. But now that its major trading partners have lifted the worst of their COVID restrictions, German exports have bounced back to levels last seen three years ago, with a <a href="https://www.bundesbank.de/dynamic/action/en/statistics/time-series-databases/time-series-databases/759784/759784?listId=www_s201_zb_qezb_13_w1">trade surplus</a> of €110 billion (£95 billion) in the first half of 2021. This confirms that the competitiveness of the German economy is the last thing anyone needs to worry about. </p>
<p>Germany did put its fiscal prudence <a href="https://www.ft.com/content/dacd2ac6-6b5f-11ea-89df-41bea055720b">on hold</a> to deal with the pandemic, condoning a budget deficit of around 6% in its efforts to support citizens and businesses. In parallel, German households have drawn down on their savings during the pandemic, though only marginally. </p>
<p>The saving rate dropped from 10% of GDP in 2019 to 7.7% of GDP in 2020. But knowing German fiscal conservatism at both the national and household levels, business as usual is likely to be <a href="https://www.ft.com/content/640d084b-7b13-4555-ba00-734f6daed078">resumed shortly</a>. </p>
<h2>The future</h2>
<p>The two most pressing issues for the new chancellor are be economic recovery from COVID and reaching net zero carbon emissions. Earlier this year, <a href="https://www.climatechangenews.com/2021/05/05/germany-raises-ambition-net-zero-2045-landmark-court-ruling/">Merkel raised</a> Germany’s targeted date for reaching net zero from 2050 to 2045 after the German constitutional court <a href="https://www.theguardian.com/world/2021/may/06/germany-to-bring-forward-climate-goals-net-zero-after-constitutional-court-ruling">found that</a> the government was violating the freedoms of young people by delaying too much of its emissions reduction until after 2030. When the nation was hit by <a href="https://www.theguardian.com/environment/2021/aug/23/climate-crisis-made-deadly-german-floods-up-to-nine-times-more-likely">terrible floods</a> in the summer, it highlighted both the urgency of responding to climate change and also the <a href="https://www.cleanenergywire.org/news/climate-change-becomes-bigger-priority-german-voters-following-floods-survey">public appetite</a> for urgent action. </p>
<p>Yet maintaining prosperity while making such huge cuts to carbon emissions is going to be a monumental challenge, not always made easier by other political decisions: for example, part of Germany’s climate plan involves phasing out coal power by 2038, but this is complicated by also phasing out nuclear power <a href="https://www.dw.com/en/germanys-atomic-phaseout-how-to-dismantle-a-nuclear-power-plant/a-47823766">by 2022</a>. </p>
<p>In sum, the new chancellor will have to maintain a very tight balance between these environmental ambitions and economic recovery and growth after COVID. Another major issue that will only make this harder is Germany’s <a href="https://arc.aarpinternational.org/countries/germany#:%7E:text=Germany's%20population%20age%2065%20and,about%2041%20million%20by%202050.">ageing population</a>. </p>
<p>Merkel <a href="https://abcnews.go.com/Business/wireStory/german-panel-suggests-pension-age-68-politicians-78146921">has lately</a> been coming under pressure to raise the state pension age to 68, having already raised it from 65 to 67 from 2029. But she has left the decision to her successor, and Scholz has ruled out such a move, insisting it is unnecessary. </p>
<p>One obvious priority should be to revisit the nation’s addiction to stagnation-inducing surpluses. By moving away from <em>schwarze null</em> to run deficits closer to the 3% permitted under the <a href="https://ec.europa.eu/info/business-economy-euro/economic-and-fiscal-policy-coordination/eu-economic-governance-monitoring-prevention-correction/stability-and-growth-pact_en">EU Stability and Growth Pact</a>, the new chancellor could create a little more space to make COVID recovery and the environmental transition easier. After the cautious Merkel years, the time is ripe for the Germans to try something different.</p><img src="https://counter.theconversation.com/content/168503/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Muhammad Ali Nasir does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Germany was steady under its longstanding chancellor, but also stagnant.Muhammad Ali Nasir, Associate Professor in Economics and Finance, University of HuddersfieldLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1561752021-03-02T03:17:02Z2021-03-02T03:17:02ZJosh Frydenberg has the opportunity to transform Australia, permanently lowering unemployment<p>Josh Frydenberg has the opportunity to become a transformational Australian treasurer. He has been bequeathed a set of circumstances that comes along rarely.</p>
<p>He has already shown himself able to shift the debate on important topics in order to achieve the previously unthinkable.</p>
<p>Most recently he did it with Google and Facebook, getting them to pay news providers for content using legislation that led the world in its breadth and force.</p>
<p>It’s actually the second time Frydenberg has taken on big tech. As assistant treasurer in 2015 he championed a “<a href="https://www.ato.gov.au/Business/International-tax-for-business/GST-on-imported-services-and-digital-products/">Netflix tax</a>” on overseas-based suppliers of online services. They would be required to collect and pass on goods and services tax, just like Australian retailers.</p>
<p>It was a tax <a href="https://www.afr.com/policy/tax-and-super/joe-hockeys-tax-integrity-measures-include-tax-for-netflix-20150423-1mrj00">experts</a> told him big tech might never pay.</p>
<h2>Frydenberg has shown boldness before</h2>
<p>Opportunities like the much bigger one in front of him now don’t come along often because Australia isn’t in recession often. Three decades ago in the early 1990s Australia’s then Reserve Bank governor Bernie Fraser seized its mirror side.</p>
<p>In the wake of an appalling recession that had destroyed both jobs and inflation, Fraser opted to finish the job and drive a stake through the heart of inflation.</p>
<p>A <a href="https://scribepublications.com.au/books-authors/books/unfinished-business">biography</a> of then treasurer Paul Keating quotes Fraser as saying “we’ve got the inflation rate down and we are damn-well going to keep it down”.</p>
<p>At the first hint of a resurgence in inflation as the economy got back on its feet Fraser rammed up interest rates an extraordinary 0.75 percentage points in August 1994, then another 1.00 percentage points in October, and a further dizzying 1.00 percentage points in December. </p>
<p>Job finished, inflation has remained tamed ever since, never again returning to the 8% and 10% common in the 1980s.</p>
<h2>Recessions create opportunities</h2>
<p>Frydenberg’s opportunity is to drive a stake through the heart of unemployment.</p>
<p>From the end of the second world war right through to the mid 1970s Australia’s unemployment rate averaged just <a href="https://melbourneinstitute.unimelb.edu.au/downloads/working_paper_series/wp1997n24.pdf">2%</a>. From then onwards until today it has averaged <a href="https://www.abs.gov.au/statistics/labour/employment-and-unemployment/labour-force-australia/latest-release#data-downloads">6.8%</a>, an embarrassment in a country capable of much, much better.</p>
<p>How much better?</p>
<p>The Reserve Bank’s pre-COVID estimate of Australia’s so-called non-accelerating inflation rate of unemployment (NAIRU) was <a href="https://www.rba.gov.au/speeches/2019/sp-ag-2019-06-12-2.html">4.5%</a>. NAIRU is the rate below which it is thought inflation and wage growth might start to climb. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/why-the-unemployment-rate-will-never-get-to-zero-percent-but-it-could-still-go-a-lot-lower-103665">Why the unemployment rate will never get to zero percent – but it could still go a lot lower</a>
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</p>
<hr>
<p>If correct, the estimate means there is no danger whatsoever in pushing Australia’s unemployment rate down from its present 6.4% to 4.5%, or lower. We won’t know how much lower until we try. Pre-COVID, US unemployment got to 3.5%.</p>
<p>Far from danger, there would be a huge payoff in permanently lowering the rate of unemployment Australia regarded as acceptable.</p>
<p>At an unemployment rate of 4.5%, an extra 255,800 Australians would be in work and earning money, providing services and paying tax. The government could save $4 billion per year in JobSeeker payments.</p>
<h2>We could go for broke</h2>
<p>Frydenberg should actually aim for a much-lower unemployment rate than 4.5%.</p>
<p>Reserve Bank Governor Philip Lowe does not say 4.5% would accelerate inflation, he says he <a href="https://theconversation.com/reserve-bank-governor-not-for-turning-no-rate-hike-until-unemployment-near-4-5-154560">doubts whether anything above 4.5% would accelerate inflation</a>.</p>
<p>And Lowe says this notwithstanding the view of the <a href="https://www.aph.gov.au/Parliamentary_Business/Hansard/Hansard_Display?bid=committees/estimate/b25544f7-b923-401b-8be1-c78f424e58ef/&sid=0001">secretary to the treasury</a> that the recession has pushed up NAIRU to around 4.75% to 5% as people who have lost their jobs have become less employable.</p>
<p>But here’s the thing. NAIRU is the <a href="https://www.investopedia.com/terms/n/non-accelerating-rate-unemployment.asp"><em>non-accelerating</em></a> inflation rate of unemployment — the rate that keeps inflation and wage growth constant.</p>
<p>Wage growth, at <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/wage-price-index-australia/latest-release">1.4%</a> and inflation, at <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/latest-release">0.9%</a> are too low. We need them to accelerate. Frydenberg and the Reserve Bank have <a href="https://cdn.theconversation.com/static_files/files/1495/Media_Release_-_Treasurer_-_Statement_on_the_Conduct_of_Monetary_Policy.pdf">agreed</a> to target inflation of 2-3%. It’s a target that would normally mean wage growth of 3-4%, where wage growth hasn’t been for the best part of a decade.</p>
<hr>
<p><strong>Wage growth below par for years</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/387355/original/file-20210302-13-1icbt6r.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/387355/original/file-20210302-13-1icbt6r.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/387355/original/file-20210302-13-1icbt6r.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=247&fit=crop&dpr=1 600w, https://images.theconversation.com/files/387355/original/file-20210302-13-1icbt6r.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=247&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/387355/original/file-20210302-13-1icbt6r.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=247&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/387355/original/file-20210302-13-1icbt6r.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=310&fit=crop&dpr=1 754w, https://images.theconversation.com/files/387355/original/file-20210302-13-1icbt6r.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=310&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/387355/original/file-20210302-13-1icbt6r.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=310&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Wage price index, total hourly rates of pay excluding bonuses, private and public, annual.</span>
<span class="attribution"><a class="source" href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/wage-price-index-australia/latest-release">ABS</a></span>
</figcaption>
</figure>
<hr>
<p>To get inflation and wage growth back up to where we want them we are going to need an unemployment rate well below the oddly-named NAIRU — well below 4.5% — for quite some time.</p>
<p>In his new book <a href="https://www.blackincbooks.com.au/books/reset">Reset</a>, economist Ross Garnaut says we should be aiming for an unemployment rate of <a href="https://theconversation.com/the-reset-to-lift-us-out-of-the-covid-recession-has-to-be-bold-returning-to-where-we-were-is-nowhere-near-good-enough-155565">3.5%</a>.</p>
<p>He says on the way down there would be time to adjust the target “up when high and accelerating inflation becomes a matter of concern, or down (further) if we approach 3.5% without inflation accelerating dangerously”.</p>
<p>As in the US, we don’t yet know how low we can safely push unemployment, but it might turn out to be very low indeed.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/the-reset-to-lift-us-out-of-the-covid-recession-has-to-be-bold-returning-to-where-we-were-is-nowhere-near-good-enough-155565">The reset to lift us out of the COVID recession has to be bold: returning to where we were is nowhere near good enough</a>
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<p>To get there Australia’s government will have to keep spending, and learn to live with big budget deficits and big debt.</p>
<p>Garnaut says to not do so would be a false economy, condemning us to “endless increases in our public debt-to-GDP ratio because we wouldn’t be producing the GDP we were capable of”.</p>
<p>The government would fund the crushing of unemployment by selling bonds to the Reserve Bank directly, bypassing financial markets in order to avoid putting further upward pressure on the dollar.</p>
<h2>Low risk, long payoff</h2>
<p>To the extent that the continuing flood of bonds further eased mortgage interest rates (which it mightn’t much, because the bonds would be long-term) the Prudential Regulation Authority would have to crack down on investor and interest-only loans as it did <a href="https://www.smh.com.au/business/banking-and-finance/banks-face-tighter-capital-rules-for-investor-and-interest-only-loans-20190612-p51wt5.html">successfully before the COVID crisis</a> in order to restrain house prices.</p>
<p>Garnaut believes there will also be a need for less-pleasant reforms to restore the prosperity Australia is capable of, but he says they will only gain widespread acceptance if it is known that anyone who wants a job can get a job — whether that’s at an unemployment rate of 3.5%, the 2% Australia once had or the 1% New Zealand had.</p>
<p>The COVID recession and rapid recovery from it have handed Frydenberg an opportunity to relentlessly drive down and crush unemployment — to finish the job.</p>
<p>If he grabs it he will be remembered as the treasurer who changed Australia, perhaps forever.</p>
<p><audio preload="metadata" controls="controls" data-duration="2814" data-image="" data-title="Reducing unemployment for good with Peter Martin" data-size="112566856" data-source="Democracy Sausage with Mark Kenny, March 4, 2021" data-source-url="https://podcasts.google.com/feed/aHR0cHM6Ly9yc3Muc2ltcGxlY2FzdC5jb20vcG9kY2FzdHMvMTA4NDIvcnNz/episode/ODIxMmY4OTEtNGFkNS00ZGIzLWIwOWQtZDcyN2RhODlhNjVl?hl=en-AU&ved=2ahUKEwiTurSRsZbvAhVW9nMBHVZFAiEQjrkEegQIBhAI&ep=6" data-license="" data-license-url="">
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Reducing unemployment for good with Peter Martin.
<span class="attribution"><a class="source" rel="nofollow" href="https://podcasts.google.com/feed/aHR0cHM6Ly9yc3Muc2ltcGxlY2FzdC5jb20vcG9kY2FzdHMvMTA4NDIvcnNz/episode/ODIxMmY4OTEtNGFkNS00ZGIzLWIwOWQtZDcyN2RhODlhNjVl?hl=en-AU&ved=2ahUKEwiTurSRsZbvAhVW9nMBHVZFAiEQjrkEegQIBhAI&ep=6">Democracy Sausage with Mark Kenny, March 4, 2021</a><span class="download"><span>107 MB</span> <a target="_blank" href="https://cdn.theconversation.com/audio/2131/democracy-sausage-peter-martin-going-for-broke-on-unemployment.mp3">(download)</a></span></span>
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<p class="fine-print"><em><span>Peter Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Now that we are recovering from recession, there’s no telling how low we could push the unemployment rate. One estimate is 3.5%.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1470132020-10-06T09:28:52Z2020-10-06T09:28:52ZThis budget will only work if business and consumers play ball<figure><img src="https://images.theconversation.com/files/361838/original/file-20201006-24-13pyx19.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">AAP/Mick Tsikas</span></span></figcaption></figure><p>This is an extraordinary giveaway budget, driven by desperate circumstances that would have been inconceivable less than a year ago.</p>
<p>The debt and deficit numbers are predictably eye-watering - but the gamble is whether they are big enough.</p>
<p>The Morrison government is pleading. </p>
<p>In particular, it is begging business to chance its hand and invest, so that activity and jobs can be restored ASAP. </p>
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<a href="https://theconversation.com/budget-2020-frydenberg-tells-australians-we-have-your-back-147014">Budget 2020: Frydenberg tells Australians, ‘we have your back’</a>
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<p>The incentives being handed to business are enormous. But it all comes down to that elusive necessity – confidence. It’s the old question about horses and whether they will drink when the water is shoved into the trough before them. </p>
<p>Equally, the government is also appealing to individuals to spend, and then spend some more. </p>
<p>There will be argument about whether it is making this pitch in the most effective way – the accelerated tax cuts have their critics.</p>
<p>They’ll certainly give many people more ready cash over coming months. The unknown is whether in these uncertain times the purse strings will be loosened.</p>
<p>The modest cash payments for pensioners – two lots of $250 – are also directed to boosting consumption. The first payment is December, nicely timed for some (modest) Christmas presents, to help the retail sector just when it needs assistance.</p>
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Read more:
<a href="https://theconversation.com/budget-2020-at-a-glance-the-cuts-the-spends-and-that-big-deficit-in-7-charts-147016">Budget 2020 at a glance: the cuts, the spends, and that big deficit in 7 charts</a>
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<p>In its subsidy for businesses to hire younger unemployed people the government is acknowledging the recession will particularly hurt this generation.</p>
<p>It is imperative to get as many as possible of those thrown out of work back into the labour force as fast as possible. </p>
<p>The motive is sound, but how effective the program will be is another matter. Much will depend on whether employers feel confident enough to take on staff.</p>
<p>These younger people have to hope the employers respond, because the Coronavirus supplement that has enhanced JobSeeker is being wound back, and is due to end, while how much the basic JobSeeker payment will eventually be set at is a decision yet to be made.</p>
<p>The budget also notes women have been hard hit by the pandemic, and it includes a “women’s economic security statement”. But its $240 million in measures seems, to put it mildly, modest when compared to other initiatives.</p>
<p>Among the unusual features of this unique budget is the relative absence of cuts. The government has been finding ways to get money out the door, not reining in expenditures.</p>
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<a href="https://theconversation.com/budget-2020-promising-tax-breaks-but-relying-on-hope-147012">Budget 2020: promising tax breaks, but relying on hope</a>
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<p>Frydenberg reprised the messages we’ve been hearing in past months from the government, which has prepared the ground for this tsunami of debt and deficits. </p>
<p>The debt would be a heavy burden, but it was a necessary one to “deal with the greatest challenge of our time”.</p>
<p>Some Liberals might have residual nightmares about debt but it is generally accepted by economists that it is totally manageable, and not even exceptional on international comparisons even if a shock in the Australian context.</p>
<p>Frydenberg repeated that the government’s initial measures to cushion the economic fallout of the pandemic had been “temporary, targeted, and proportionate”.</p>
<p>But the economic support cannot be temporary and this budget represents the next phase of it.</p>
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Read more:
<a href="https://theconversation.com/the-budgets-tax-cuts-have-their-critics-but-this-year-they-make-fiscal-sense-147015">The budget's tax cuts have their critics, but this year they make fiscal sense</a>
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<p>JobKeeper will be wound back, despite many experts believing it should extend much longer than its planned life, but other mechanisms have to be deployed to support the economy. </p>
<p>The budget is attempting to make a successful transition from the direct support represented by JobKeeper to indirect support through the use of tax breaks to encourage business investment.</p>
<p>At some stage, the transition has to be made. That’s recognised by both sides of politics. The debate is around the timing and the mechanism for making it.</p>
<p>While assuring us the government has our backs, Frydenberg had a double message for Australians in his budget speech. “The road to recovery will be hard,” he said. “But there is hope.”</p>
<p>Among the hopeful assumptions in the budget is that “a population-wide COVID-19 vaccination program will be fully in place by late 2021”.</p>
<p>That’s perhaps the biggest call of all. </p>
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Read more:
<a href="https://theconversation.com/the-budget-assumes-a-covid-19-vaccine-becomes-available-next-year-is-this-feasible-147557">The budget assumes a COVID-19 vaccine becomes available next year. Is this feasible?</a>
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<p class="fine-print"><em><span>Michelle Grattan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The government wants consumers to spend, spend, spend: the question is whether they will feel confident to do so.Michelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1470152020-10-06T08:54:28Z2020-10-06T08:54:28ZThe budget’s tax cuts have their critics, but this year they make fiscal sense<figure><img src="https://images.theconversation.com/files/361849/original/file-20201006-16-1wsngfo.jpg?ixlib=rb-1.1.0&rect=0%2C16%2C5559%2C3684&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">AAP/Lukas Coch</span></span></figcaption></figure><p>This year’s budget is something of a play in two acts. Act one involves large economic stimulus to help plug the hole in output generated by the coronavirus pandemic. Act two tries to set Australia up for a bounce back in economic growth and employment that involves more than just waiting for the pandemic to end.</p>
<p>The headline figures that will rightly garner much attention are the $213.7 billion deficit for 2020-21—representing 11.0% of GDP – and the increase in net debt to 43.8% of GDP by 2023-24.</p>
<p>Tax receipts are down, but of course spending has rocketed up to $677.4 billion for 2020-21, compared to a projection of $514.5 billion for that period at the last budget.</p>
<p>The massive JobKeeper wage-subsidy program, the coronavirus supplements to various welfare payments, and a number of smaller schemes to encourage building, hiring of apprentices, and boosting manufacturing all add up to an unprecedented boost in government spending.</p>
<p>There is room for debate about the structure of these programs and even whether they are large enough, but they are basically sound as fiscal mitigation.</p>
<h2>Tax cuts and their critics</h2>
<p>Much was made in the leadup to the budget about the possibility of bringing forward the already-legislated “phase 2” and “phase 3” personal income tax cuts, due to begin on July 1 2022 and July 1 2024, respectively.</p>
<p>Phase 2, which involves raising the income threshold where the 37% marginal rate kicks in from $90,000 to $120,000, has been brought forward to this fiscal year. Phase 3, which abolishes the 37% bracket altogether, letting the top marginal rate of 45% kick in at a new $200,000 threshold will have to wait until 2024, as scheduled.</p>
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<p>Critics of such cuts make two main arguments. The first is that the tax cuts are “unfair” because people on higher incomes get more of them. The second is that the cuts are bad economics, because higher-income households just save the tax cuts, and what we need right now is lots of spending.</p>
<h2>Hand-to-mouth consumers</h2>
<p>There is, indeed, a compelling case for putting more money in the hands of those who will spend it. Household consumption accounts for nearly 60% of GDP, and during recessions such consumption takes a pounding. 2020 in Australia is no exception.</p>
<p>That said, there is a widespread assumption – more like an article of faith, really – that those at the lower end of the income distribution will spend any temporary income they receive. And this article of faith has a corollary: <em>only</em> those at the bottom of the income distribution will spend such temporary income.</p>
<p>This leads folks to conclude there is downward sloping relationship between income and spending of government stimulus – the lower one’s income the more one spends.</p>
<p>But, as an empirical matter, this just isn’t true.</p>
<p>As economists Greg Kaplan, Giovanni Violante and Justin Weidner <a href="https://static1.squarespace.com/static/5d69437d65a29d0001ae6520/t/5daa19558888306a716bd6a1/1571428695918/kaplan_violante_weidner_2014.pdf">have pointed out</a>, Australia has an unusual composition of “hand-to-mouth” consumers – that is consumers who spend all of their available resources every pay period because they have relatively little liquid wealth compared to their monthly expenses.</p>
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<a href="https://theconversation.com/budget-2020-frydenberg-tells-australians-we-have-your-back-147014">Budget 2020: Frydenberg tells Australians, ‘we have your back’</a>
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<p>First, we have many fewer such people than countries like the United States, United Kingdom, or Canada – a little under 20% of the population. Second, and more strikingly, most of the Australian hand-to-mouth consumers – 90% of them – are wealthy. That is, they have a relatively large amount of total wealth – things like real estate assets and superannuation accounts.</p>
<p>Only 2.7% of Australian consumers are “poor, hand-to-mouth consumers”.</p>
<p>Notice this shatters the idea of a downward sloping income-gradient to spending. People across the income distribution spend stimulus payment.</p>
<p>Now, you might not feel too bad for a household with a good amount of equity in an expensive home and solid superannuation balances, but with large expenses like a big mortgage payment and private school fees. Fair enough. But that doesn’t mean they won’t spend additional income.</p>
<h2>The effect of the tax cuts</h2>
<p>As it stands, those earning $40,000 a year will pay $1,060 less tax this year than in the 2018 fiscal year. Those earning $60,000 will pay $2,160 less, and those earning $100,000 and above will pay around $2,500 less.</p>
<p>As a stimulus measure that’s far from crazy.</p>
<p>And as a growth-enhancement measure the phase 2 and 3 tax cuts make a lot of sense. Taxing labour income tends to lead to people working less. That’s less economic growth, less personal income, less tax, and less spending.</p>
<p>The exact magnitude of this – what economist call labour-supply elasticities –varies by type of worker and on the exact nature of the tax schedule. But as Michael Keane and Richard Rogerson <a href="https://www.jstor.org/stable/23270026?casa_token=opbqX9uwSaAAAAAA:DUsAwtRDCKT5XfNgpVfAQP7tSeq9frDFnx_kCoDxoOK9GgFh2JwDRDmcmqeEx4ohjq67np34_C8a1awB-8kT_Ib3cXer2l3VPTJcuXdoroekRHVIdRXA_">have noted</a>, these effects are large in the aggregate.</p>
<h2>Boosting the economy now and in the future</h2>
<p>The economic problem we have been facing since March has been filling a massive drop in economic output. That will remain the central problem unless and until we have a widely-deployed vaccine.</p>
<p>But we cannot wait to tackle the supply side of the economy until after the immediate problems have been addressed. This budget takes a small step in that direction by bringing forward the phase 2 tax cuts. By not bringing the phase 3 cuts forward the government avoids a political fight, but risks waiting too long to begin the task of serious tax reform which is long overdue.</p><img src="https://counter.theconversation.com/content/147015/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The government has brought forward planned future tax cuts. And while some say we shouldn’t be cutting taxes during a recession, the plan has its merits.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1470122020-10-06T08:43:50Z2020-10-06T08:43:50ZBudget 2020: promising tax breaks, but relying on hope<figure><img src="https://images.theconversation.com/files/361762/original/file-20201006-18-guj0g6.png?ixlib=rb-1.1.0&rect=5%2C11%2C3988%2C1958&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
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<p>The personal income tax cuts promised in the budget will cost A$17.8 billion over four years. </p>
<p>The measures aimed at supporting businesses – the temporary instant tax write off of capital investments, the temporary ability to use losses to reduce previous tax payments, the JobMaker hiring credit and the enhanced apprentice wage subsidy — will cost $26.7 billion, $4.8 billion, $4 billion and $1.2 billion.</p>
<p>That’s a total of <a href="https://budget.gov.au/2020-21/content/download/glossy_overview.pdf">$36.7 billion</a> — a subsidy for private businesses without precedent.</p>
<p>The clumsy wording in the part of the budget that sets out strategy says the aim is to “<a href="https://cdn.theconversation.com/static_files/files/1279/2020_budget_strategy._1.pdf?1602125032">drive sustainable, private sector-led growth and job creation</a>”.</p>
<h2>‘Driving private sector-led growth’</h2>
<p>Driving private sector-led growth doesn’t quite make sense, but it’s easy to get a handle on what it means.</p>
<p>By itself, business isn’t in a position to drive much.</p>
<p>Even with the budget measures – even with the Australian Taxation Office allowing most businesses to write off everything they spend on equipment over the next two years – non-mining business investment is expected to collapse <a href="https://budget.gov.au/2020-21/content/bp1/download/bp1_bs2.pdf">14.5%</a> this financial year and bounce back only 7.5% the next.</p>
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<p>The JobMaker hiring credit is intended to be a smarter version of the JobKeeper wage subsidy, which was wound back at the end of September, and will be wound back again after Christmas, before vanishing at the end of March.</p>
<p>Instead of helping pay the wages of all employees in businesses affected by the pandemic – the budget papers say right now it is helping pay 3.5 million wages, more than a quarter of the workforce – it’ll help pay the wages only of extra employees taken on.</p>
<h2>JobKeeper replaced with something weaker</h2>
<p>And only if they are aged between 16 and 35 and have previously been on JobSeeker or a related payment.</p>
<p>It’ll last for just a year and be worth only $100 or $200 a week, depending on the age of the person hired.</p>
<p>The government says it will support 450,000 positions. </p>
<p>But because a much larger subsidy for millions of positions will be withdrawn, there’s a risk employment will collapse as businesses especially affected by the pandemic (in industries such as tourism) find they can no longer afford to keep the staff they’ve got, let alone take on new ones.</p>
<p>It makes the budget a statement of faith, or hope.</p>
<h2>Tax cuts in the hope we spend</h2>
<p>There’s also hope we’ll spend the tax cuts that have been brought forward. </p>
<p>As of the start of this this financial year (it’ll be backdated), you can earn up to $45,000 instead of $37,000, paying just 19 cents in the dollar tax and nothing on the first $18,200.</p>
<p>High earners can keep paying 32.5 cents in the dollar right up to $120,000 instead of $90,000.</p>
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<p>Low earners will get an offset of up to $700, middle earners an offset of up to $1,080 for another year.</p>
<p>Pensioners and recipients of carer payments and family tax benefits will get two extra cash payments of $250, on top of the two of $750 each earlier this yer, to be delivered in December and March.</p>
<p>The government is hoping the payments and the tax cuts will keep the slump in consumer spending to 1.5% this year, followed by a rebound of 7% next financial year.</p>
<h2>All being well, unemployment will fall</h2>
<p>It expects the unemployment rate to peak at 8% in the last three months of this year and then to fall to 6.5% by mid-2022.</p>
<p>It says the “effective unemployment rate”, which counts as unemployed people who are working zero hours (because of JobKeeper or other reasons) peaked at close to 15% in April, before sliding to around 9.25%. </p>
<p>The economy is expected to grow a larger than normal 4.75% next financial year and then to grow by 3% after falling 1.5% this financial year.</p>
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<p>While not returning to surplus at any time in the next ten years, the budget deficit is expected to shrink from an eye-watering $213.6 billion this financial year (11% of gross domestic product) to -11.0 to $66.9 billion in 2023-24 (3% of GDP).</p>
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<p>It’ll do it as spending returns to normal, which it might, if everything turns out as assumed.</p>
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<h2>A lot needs to go right</h2>
<p>But the budget says, in words stronger than those used previously, “outcomes could be substantially different to the forecasts, depending upon the extent to which these assumptions hold.”</p>
<p>Those assumptions are that from here on, localised outbreaks of COVID-19 occur but are largely contained, a population-wide vaccination program is fully in place by late 2021, general social distancing restrictions continue until that happens and Victoria’s special restrictions and state border restrictions are lifted by the end of the year — except for Western Australia’s which will be lifted by April 2021.</p>
<p>There are other assumptions.</p>
<p>International travel is expected to remain low until late next year and then climb, allowing net overseas migration to reach 201,000 by 2023-24, still less than the 271,000 per year that was common.</p>
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<p>For this year and next year, net overseas migration will be negative, as we lose more people to overseas than we gain from overseas. </p>
<p>Only a (somewhat diminished) birth rate will stop the population shrinking.</p>
<h2>A lot could quickly date</h2>
<p>The government’s most-recent economic statement, in July, was rendered out of date within days as Victoria went into stage 4 lockdown. </p>
<p>Anything could happen to render the budget forecasts redundant, and probably will.</p>
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<p>From my standpoint, the government is putting too much store on businesses driving the recovery after JobKeeper has been wound back.</p>
<p>But if businesses don’t, it has given every indication it is prepared to do more. It’s hard to fault much of what its done. It has certainly shown its willingness to be flexible.</p><img src="https://counter.theconversation.com/content/147012/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Assuming jobs will grow as JobKeeper is wound back is a leap of faith.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1470142020-10-06T08:41:05Z2020-10-06T08:41:05ZBudget 2020: Frydenberg tells Australians, ‘we have your back’<p>Accelerated tax cuts, cash splashes for pensioners, massive incentives for business to invest and a subsidy to hire unemployed people are the centrepieces of the Morrison government’s COVID-19 budget.</p>
<p>More than 11 million taxpayers will get a tax cut backdated to July 1, giving lower and middle-income earners tax relief this financial year of up to $2,745 and dual income families relief of up to $5,490, compared to their tax in 2017-18.</p>
<p>Australians on pensions and other eligible recipients will also receive a cash handout of $250 from December and another $250 from March next year.</p>
<p>Treasurer Josh Frydenberg said the Australia economy was “fighting back”, with more than half of those who had lost their jobs now back at work. But “there remains a monumental task ahead,” he said, assuring Australians “we have your back”. </p>
<p>“The road to recovery will be hard — but there is hope,” he said</p>
<p>A budget focused on creating jobs delivers multiple measures to boost business activity, and a new plan to subsidise hiring young people who are unemployed for up to a year. </p>
<p>Frydenberg said the Australian economy had been hit hard, but “we have a plan to rebuild our economy and to create jobs”.</p>
<h2>Massive deficit</h2>
<p>The budget has a massive $213.7 billion deficit for this year. It will stay in the red throughout the budget period, with deficits totalling $480.5 billion over the next four years.</p>
<p>Net debt will reach $703 billion this financial year – more than 36% of GDP, rising to $966 billion (44% of GDP) by June 2024.</p>
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<p>Frydenberg told parliament, “this is a heavy burden, but a necessary one to responsibly deal with the greatest challenge of our time”. </p>
<p>The economy is forecast to contract by 3.75% this calendar year, with unemployment peaking at 8% in the December quarter. In the 2021 calendar year, economic growth is forecast to be 4.25%, with unemployment falling to 6.5% by the June quarter 2022. </p>
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Read more:
<a href="https://theconversation.com/budget-2020-promising-tax-breaks-but-relying-on-hope-147012">Budget 2020: promising tax breaks, but relying on hope</a>
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<p>In his speech to parliament, Frydenberg reiterated the government’s two-phase strategy. </p>
<p>The first phase is to focus on “boosting consumer and business confidence, growing the economy and creating jobs”.</p>
<p>Once unemployment is “comfortably below 6%” the government will move to phase two, “where there is a deliberate shift from providing temporary and targeted support to stabilising gross and net debt as a share of the economy.”</p>
<p>“We will then rebuild our fiscal buffers, so that we can be prepared for the next economic shock,” Frydenberg said. </p>
<p>The income tax cuts, at nearly $7 billion, are the biggest cost this financial year, rising to nearly $18 billion in total over the forward estimates.</p>
<h2>Tax cuts brought forward</h2>
<p>The government is bringing forward stage two of its already legislated tax plan, lifting the 19% threshold from $37,000 to $45,000 and the 32.5% threshold from $90,000 to $120,000.</p>
<p>It is also retaining the Low and Middle Income Tax Offset for an extra year.</p>
<p>Frydenberg said, as a proportion of tax payable, compared to 2017-18, the greatest benefit would flow to people on lower incomes, with those earning $40,000 paying 21% less tax, and people on $80,000 paying about 11% less tax this year. </p>
<p>“Under our changes, more than seven million Australians receive tax relief of $2,000 or more this year,” Frydenberg said. </p>
<h2>JobMaker hiring credit and huge tax breaks</h2>
<p>A new JobMaker hiring credit will be available for employers who take on people on JobSeeker aged 16 to 35. The subsidy will be $200 a week for those under 30 and $100 a week for older people. These new hires must work at least 20 hours a week. All businesses except big banks will be able to use the scheme and the government says it will support about 450,000 jobs for young people. </p>
<p>The hiring credit will cost $850 million in the current financial year, rising to $2.9 billion in 2021-22, and $4 billion in total over the forward estimates.</p>
<p>The government says the initiative will support about 450,000 young people into jobs.</p>
<p>Tax breaks for business are huge over the budget period.</p>
<p>From budget night, more than 99% of businesses will be able to write off the full value of any eligible asset they purchase. The concession will be available for businesses with a turnover of up to $5 billion until mid-2022, with the program costing $26.7 billion over the forward estimates.</p>
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Read more:
<a href="https://theconversation.com/the-budgets-tax-cuts-have-their-critics-but-this-year-they-make-fiscal-sense-147015">The budget's tax cuts have their critics, but this year they make fiscal sense</a>
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<p>Frydenberg described the concession as “a game changer” which “will unlock investment”. </p>
<p>“It will dramatically expand the productive capacity of the nation and create tens of thousands of jobs.”</p>
<p>In another business initiative, companies will be able to use their losses earlier.</p>
<p>Frydenberg said the combination of these two measures would create an extra 50,000 jobs.</p>
<h2>Infrastructure and water spending</h2>
<p>The government is also looking to infrastructure to stimulate activity, with Frydenberg saying “the budget will see $14 billion in new and accelerated infrastructure projects.”</p>
<p>As part of supporting the regions, Frydenberg announced $2 billion in new funding to build water infrastructure. </p>
<p>With women’s jobs particularly badly hit during the recession, the budget has a women’s economic security statement including $240 million in measures.</p>
<h2>Thousands of new home care packages</h2>
<p>On aged care, Frydenberg announced an increase of 23,000 home care packages, costing $1.6 billion. He said the government would provide “a comprehensive response” after the royal commission’s final report on aged care, which comes early next year.</p>
<p>The government is also implementing reforms to superannuation arrangements. </p>
<p>New superannuation accounts will no longer be automatically created when a worker moves jobs. “Under our reforms, your super will follow you,” Frydenberg said.
The government had previously flagged that it would implement the change, recommended by the Productivity Commission. </p>
<p>Labour described the budget as a “grab bag of headline seeking announcements” which would “rack up a trillion dollars of debt, but still doesn’t do enough to create jobs, fails to build for the future and leaves too many Australia’s behind”.</p>
<p>Business welcomed the budget, with the Business Council of Australia saying it was “about getting Australians back to work, and getting businesses back on track”.</p>
<p>The Australian Chamber of Commerce and Industry said “Australian entrepreneurs will be energised by the unparalleled investment incentives”.</p>
<p>ACTU secretary Sally McManus tweeted:</p>
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<p>The Community Housing Industry Association said the budget’s extension of the government guarantee for the National Housing Finance and Investment Corporation by $1 billion was welcome but criticised the lack of direct investment in social housing.</p><img src="https://counter.theconversation.com/content/147014/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michelle Grattan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The federal budget is set to deliver faster tax cuts and cash for pensioners amid a Herculean push to create more jobs.Michelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1435532020-07-28T13:05:30Z2020-07-28T13:05:30ZThe IMF’s $4bn loan for South Africa: the pros, cons and potential pitfalls<figure><img src="https://images.theconversation.com/files/349884/original/file-20200728-15-19u89b5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South Africa's finance minister Tito Mboweni says the IMF loan will limit the country's economic vulnerabilities which have been exacerbated by COVID-19.</span> <span class="attribution"><span class="source">Gallo Images/Brenton Geach</span></span></figcaption></figure><p><em>The International Monetary Fund (IMF) has approved a R70 billion (US$4.3 billion) loan for South Africa to help the country manage the immediate consequences of the fallout from COVID-19. The Conversation Africa’s editor, Caroline Southey, asked Danny Bradlow to shed some light on what South Africans should expect.</em></p>
<h2>What conditions has the IMF attached to the disbursement?</h2>
<p>The IMF has provided the funding through its <a href="https://www.imf.org/en/About/Factsheets/Sheets/2016/08/02/19/55/Rapid-Financing-Instrument">Rapid Financing Instrument</a>. This is designed to support countries facing an urgent need for financing due to a crisis such as the COVID-19 pandemic. The goal is to help the country face the immediate financial consequences of the crisis. As a result the IMF provides the financing quickly and without strict conditions. The country merely needs to show the IMF that it is facing a crisis, that it will use the funds to deal with the crisis, that it will cooperate with the IMF to solve the balance of payments problems caused by the crisis and to describe the economic policies that it proposes to follow. </p>
<p>In some cases, the IMF may require the country to undertake certain policy actions before it can access the funds.</p>
<p>In South Africa’s case, the country’s payments problem relates to the fact that the economy is expected to contract by about 7% this year and the budget deficit to increase to <a href="https://www.gov.za/speeches/minister-tito-mboweni-2020-supplementary-budget-speech-24-jun-2020-0000">about 15% of GDP</a>. This means that the government will need to increase the amount it has to borrow. Given that it has been <a href="https://www.fitchratings.com/research/islamic-finance/fitch-downgrades-south-africa-to-bb-outlook-negative-03-04-2020">downgraded</a> by <a href="https://www.reuters.com/article/safrica-ratings/moodys-downgrades-south-africa-sovereign-rating-to-junk-idUSL8N2BK8M5">credit rating agencies</a>, and that the economy is in bad shape, there is a substantial risk that both local and foreign investors will have a limited appetite for South African debt. This will complicate the government’s efforts to finance the deficit. </p>
<p>The IMF loan helps resolve this problem. </p>
<p>South Africa provided the requisite information to the IMF in the form of a letter of intent signed by the minister of finance and the governor of the Reserve Bank. The letter has not yet been made public. But, according to the <a href="https://www.imf.org/en/News/Articles/2020/07/27/pr20271-south-africa-imf-executive-board-approves-us-billion-emergency-support-covid-19-pandemic">IMF press release</a>, South Africa seems to have informed the IMF that it intends to take certain steps to stabilise the country’s finances. This means that the government will cut government spending to reduce its need to borrow. The current disputes over public sector wages and funding for state owned enterprises are examples of steps it could take. The government has also said it will improve the governance of state owned enterprises, and introduce reforms to stimulate a growing and inclusive economy. These reforms could include measures to improve competition in different sectors of the economy. </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/south-africans-should-accept-that-the-imf-is-neither-their-worst-enemy-nor-their-saviour-143199">South Africans should accept that the IMF is neither their worst enemy nor their saviour</a>
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<p>South Africa made these undertakings in last October’s <a href="http://www.treasury.gov.za/documents/mtbps/2019/mtbps/FullMTBPS.pdf">medium term budget statement</a> and in the supplementary budget statement in <a href="https://www.gov.za/speeches/minister-tito-mboweni-2020-supplementary-budget-speech-24-jun-2020-0000">June this year</a>. </p>
<p>This suggests that the IMF is merely expecting the country to implement the policies already announced by the government.</p>
<h2>How will the money be disbursed?</h2>
<p>This kind of financing is provided in one payment. The IMF press statement doesn’t say when the funds will be disbursed but the goal is to make the funds available “rapidly”. That could be as early as August. </p>
<p>Once the funds are disbursed, the government will be free to spend them. According to the national treasury’s <a href="https://www.gov.za/speeches/treasury-imf-approval-us43-billion-financial-support-south-africa-deal-coronavirus-covid-19">statement</a>, it plans to use the money to support health and frontline services, to protect the vulnerable, drive job creation, support economic reform and stabilise public debt. </p>
<p>These are all consistent with the purpose of the Rapid Financing Instrument and the government’s stated intentions. </p>
<p>But these purposes are very general and we will need to see more detail about what exactly the government will spend the funds on.</p>
<h2>What restrictions are there on the government’s ability to use the money?</h2>
<p>The IMF loan <em>does not</em> impose any conditions over and above what is in South African law on how the funds can be used. Consequently, the funds will be subject to the same procurement and accounting requirements as all other budgetary expenditure. </p>
<p>In addition, the government will have to account in its future budget statements and reports to parliament on how the funds have been used. South Africans will also be able to demand that the government demonstrate that the funds have been spent consistently with the requirements of the constitution and bill of rights. This means the government should show that it is using the maximum available resources, from whatever source, to help realise all the rights that the constitution and South Africa’s international commitments grant to South Africans.</p>
<p>The IMF requires that South Africa repay the funds to the IMF over 20 months beginning 40 months after the loan is disbursed. This means that South Africans will need to ensure that the funds to repay the IMF are properly budgeted for.</p>
<h2>What are the upsides of the loan?</h2>
<p>The most important benefit is that South Africa is getting $4.2 billion at about 1.1% interest. This is a very cheap source of funds. If the government tried to raise the same amount either on domestic markets or from other international sources it would pay a considerably higher interest rate – the current rate for government bonds of comparable maturity is about <a href="http://www.worldgovernmentbonds.com/country/south-africa/#:%7E:text=The%20South%20Africa%2010Y%20Government%20Bond%20has%20a%209.155%25%20yield.&text=Normal%20Convexity%20in%20Long-Term,last%20modification%20in%20July%202020">7%</a>.</p>
<p>The second potential benefit is that the IMF loan will catalyse other funds for the country. In other words investors in South Africa and abroad will interpret the IMF’s action as an expression of support for South Africa and this will give them the confidence to invest in South African debt. Given that foreign investors hold about <a href="https://sec.report/Document/0001104659-20-044565/">30% of South African government’s rand denominated debt</a> this boost to confidence could be important. It will both reduce the incentive of these investors to sell their government bonds, potentially pushing up interest rates, and enable the government to issue new debt if needed.</p>
<p>The third benefit is that by helping to stabilise South Africa’s situation, it will limit the damage that may be inflicted on the neighbouring countries. This, in turn, could help South African exports and thus help preserve jobs and income in South Africa.</p>
<h2>What are the downsides?</h2>
<p>The most significant downside is that the loan is denominated in foreign exchange. Thus South Africa has to bear the risk that if the rand depreciates, the loan and the interest on it will become more expensive. Given the state of the South African economy, this is not an insignificant risk. </p>
<p>But it’s important to keep in mind that the IMF denominates the loan and the repayment obligations in Special Drawing Rights. These are the IMF’s special form of money and its value is made up of a composite of a basket of currencies. These include the US dollar, the euro, the Japanese yen, the Chinese renminbi and the pound sterling. The values of these currencies tend to fluctuate against each other so that some appreciate while others depreciate. This helps mitigate the foreign exchange risk that South Africa must bear.</p>
<p>The second risk is that if South Africa does not use the funds from the IMF wisely, the country’s economic situation will deteriorate and it will struggle to pay back the debt. </p>
<p>If this happens or the pandemic lasts longer than anticipated, the country could be forced to seek additional support. In either case South Africa’s negotiating position would be significantly weaker.</p><img src="https://counter.theconversation.com/content/143553/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Danny Bradlow's SARCHI chair is funded by the National Research Foundation. He also has a grant from the Open Society Initiative of Southern Africa (OSISA) for a project on sovereign debt in the SADC region. </span></em></p>The IMF loan does not impose any conditions over and above what is in South African law on how the funds can be used; it only seems to expect the country to implement policies already announced.Danny Bradlow, SARCHI Professor of International Development Law and African Economic Relations, University of PretoriaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1372412020-07-02T20:08:12Z2020-07-02T20:08:12ZThe spending splurge matters, regardless of what modern monetary theory says<figure><img src="https://images.theconversation.com/files/345202/original/file-20200702-2640-z42t7y.jpg?ixlib=rb-1.1.0&rect=26%2C53%2C3535%2C1880&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>The Australian government is planning to spend A$190 billion to support the economy in response to COVID-19, according to the latest <a href="https://www.aph.gov.au/-/media/05_About_Parliament/54_Parliamentary_Depts/548_Parliamentary_Budget_Office/Reports/Research_reports/Post_COVID-19_medium-term_fiscal_scenarios/Medium-term_fiscal_projection_scenarios_-_impact_of_COVID-19_pandemic_and_response_pdf.pdf">Parliamentary Budget Office</a> estimate. </p>
<p>The total impact of COVID-19 on the government’s net debt, including both revenue impacts (down, because of less activity) and spending impacts (up because of spending to support the economy) amounts to between 11% and 18% of gross domestic product, or A$500 billion to A$620 billion.</p>
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<span class="attribution"><a class="source" href="https://www.aph.gov.au/-/media/05_About_Parliament/54_Parliamentary_Depts/548_Parliamentary_Budget_Office/Reports/Research_reports/Post_COVID-19_medium-term_fiscal_scenarios/Medium-term_fiscal_projection_scenarios_-_impact_of_COVID-19_pandemic_and_response_pdf.pdf">Parliamentary Budget Office</a></span>
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<p>The estimates are based on the three possible scenarios developed by the <a href="https://www.rba.gov.au/publications/smp/2020/may/economic-outlook.html">Reserve Bank</a>: “downside”, “baseline” and “upside”. Each differ in their assumed timing of the relaxation of social distancing and other restrictions, and for how long uncertainty and diminished confidence weigh on households and business activity.</p>
<p>With similar blow-outs around the world, a view gaining ascendancy, including amongst commentators such as <a href="https://www.theaustralian.com.au/business/its-modern-monetary-theory-time-as-the-state-steps-in/news-story/ab070170b6b70ad4dd1fb4319ae1947a">Alan Kohler</a>, is that government debt doesn’t matter – provided the government owes the money to its central bank (in Australia’s case, the Reserve Bank) or the bank is prepared to buy the debt from the party the government borrowed the money from.</p>
<p>The view is an application of so-called <a href="https://www.businessinsider.com.au/modern-monetary-theory-mmt-explained-aoc-2019-3">modern monetary theory</a> and the argument goes like this:</p>
<ol>
<li><p>when the government runs a budget deficit, it borrows from the private sector (mainly financial institutions) by selling government bonds which are effectively IOUs offering to repay in a certain number of years and offering interest at a low <a href="https://theconversation.com/no-big-bounce-2020-21-economic-survey-points-to-a-weak-recovery-getting-weaker-amid-declining-living-standards-141184">bond rate</a> until then</p></li>
<li><p>the Reserve Bank (along with other central banks) has been buying bonds from the private sector with money it <a href="https://www.rba.gov.au/education/resources/explainers/unconventional-monetary-policy.html">creates</a>, and says it is prepared to buy as many <a href="https://theconversation.com/more-than-a-rate-cut-behind-the-reserve-banks-three-point-plan-134140">as are needed</a> to keep the bond yield low, so that if it looks as if the bond rate will rise, much of the debt will ultimately be owed to the bank </p></li>
<li><p>when the bonds expire and it is time to repay the debt, the government can simply issue more bonds which the bank will ultimately buy if it has to in order to keep the bond rate low</p></li>
<li><p>if down the track all of the extra money in the banking system causes inflation, the process would be thrown into reverse: the government can the deficit, repay the Reserve Bank and others when loans fall due and cut the supply of money, slowing down inflation.</p></li>
</ol>
<p>It sounds too good to be true, because it is.</p>
<p>There are a number of reasons why deficits and debt do matter, even if the debt is effectively owed to the central bank and even if it has been created in a recession, or in anticipation of one – as is the case for the COVID-19 response.</p>
<h2>Creating money carries risks</h2>
<p>We know that governments with high debt face <a href="https://voxeu.org/article/public-debt-and-risk-premium">interest rate premiums</a> from lenders. A European Union <a href="https://ec.europa.eu/info/sites/info/files/economy-finance/ip100_chap_i_sovereign_bond_dynamics_in_the_ea.pdf">study</a> found that a 10 percentage point increase in the government debt to GDP ratio increased the sovereign bond rate by 0.47 percentage points. </p>
<p>These higher risk premia flow on to private sector borrowers whose interest rates are set in relation to sovereign interest rates, so all households and businesses face higher rates. The result will be less investment and household spending than there would otherwise be.</p>
<p>An attempt by the central bank to negate the risk premium by buying more bonds would allow the government to issue even more bonds, increasing the risk of inflation which would itself put upward pressure on interest rates. </p>
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Read more:
<a href="https://theconversation.com/explainer-what-is-modern-monetary-theory-72095">Explainer: what is modern monetary theory?</a>
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<p>The <a href="https://www.cato.org/publications/cato-journal/modern-monetary-theory-cautionary-tales-latin-america">experience</a> of Latin American countries that relied on their central banks to create money is frightening. <a href="https://www.economist.com/the-americas/2014/01/30/the-party-is-over">Argentina and Venezuela</a> in particular experienced inflation rates of up to 50% and plummeting exchange rates.</p>
<p>The idea that, if and when inflation arrives, the Australian government could easily throw its spending and tax engines into reverse is fanciful. It is politically difficult to wind back government spending and raise taxes. To do so on a large scale might be impossible. </p>
<p>Modern Monetary theorists respond by pointing out that we have not yet seen inflation in Western countries that have pumped up their money supplies. </p>
<p>That’s true, but while the government has been running up debt, we have seen inflation of a sort in big increases in asset prices in housing and stock markets. </p>
<p>It has made us more vulnerable to financial shocks and priced many first home buyers out of the market.</p>
<h2>Markets aren’t forgiving</h2>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/345216/original/file-20200702-111318-1nbdf7l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/345216/original/file-20200702-111318-1nbdf7l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=971&fit=crop&dpr=1 600w, https://images.theconversation.com/files/345216/original/file-20200702-111318-1nbdf7l.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=971&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/345216/original/file-20200702-111318-1nbdf7l.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=971&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/345216/original/file-20200702-111318-1nbdf7l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1221&fit=crop&dpr=1 754w, https://images.theconversation.com/files/345216/original/file-20200702-111318-1nbdf7l.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1221&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/345216/original/file-20200702-111318-1nbdf7l.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1221&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Markets aren’t always forgiving.</span>
</figcaption>
</figure>
<p>And what if the foreign exchange market does not buy the modern monetary theory story?</p>
<p>Even the expectation of future inflation by the market, before it arrives, could lead to a depreciation of the Australian dollar which could itself create inflation which would make Australians poorer.</p>
<p>A final point: the Reserve Bank of Australia is <a href="https://www.rba.gov.au/speeches/1994/sp-gov-231194.html">independent</a> from the government. </p>
<p>If confidence in this independence was eroded, we could see an increase in perceived risk of holding Australian financial assets. This in turn would cause higher interest rates and a lower Australian dollar.</p>
<p>In any case, the Reserve Bank might decide at some point that the risk of inflation or asset price inflation is unacceptable and refuse to buy more government bonds, or sell back to the private sector the bonds it’s bought.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/vital-signs-do-deficits-matter-any-more-112680">Vital Signs. Do deficits matter any more?</a>
</strong>
</em>
</p>
<hr>
<p>This would mean the government debt was owed to the private sector once again. Financial markets might view it as more risky than debt owed to the bank, with negative consequences for interest rates and the exchange rate.</p>
<p>I am inclined to agree with the International Monetary Fund’s chief economist who said in relation to modern monetary theory before the COVID crisis that there was “<a href="https://www.spglobal.com/marketintelligence/en/news-insights/trending/LHRNnQEyM6k4jfSWbND0AQ2">no free lunch</a>”.</p>
<p>Martin Wolf of the Financial Times said during the crisis that modern monetary theory was both <a href="https://www.ft.com/content/74448b70-b144-11ea-a4b6-31f1eedf762e">right and wrong</a>. </p>
<p>It was right, because there is no simple budget constraint. It was wrong, because it would prove impossible to manage the economy sensibly once politicians believed there was no simple budget constraint.</p><img src="https://counter.theconversation.com/content/137241/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ross Guest does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Modern Monetary Theory is suddenly popular because it implies governments can spend as much as they need to. But that spending comes with risks.Ross Guest, Professor of Economics and National Senior Teaching Fellow, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1414782020-06-26T07:24:27Z2020-06-26T07:24:27ZSouth Africa’s new budget cushions the coronavirus blow – but only briefly<figure><img src="https://images.theconversation.com/files/344070/original/file-20200625-33515-1vyskl3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Parliament will almost certainly rubber-stamp Finance Minister Tito Mboweni's supplementary budget</span> <span class="attribution"><span class="source">Getty Images</span></span></figcaption></figure><p>The <a href="http://www.treasury.gov.za/documents/national%20budget/2020S/speech/speech.pdf">adjustment budget</a> tabled by South Africa’s finance minister, Tito Mboweni, this week is less an adjustment than a new budget. That was necessitated by three things: a collapse in economic activity, a large decline in tax revenue collection, and the need to increase the money allocated to departments and programmes linked to the government’s COVID-19 response.</p>
<p>The adjustments to the 2020 budget partly cushion the initial blow of the COVID-19 pandemic and the government’s lockdown. But the relief is only temporary and measures to contain the growth in debt will bite hard in years to come. Some cried wolf about austerity budgets in South Africa after the global financial crisis in 2008 before they were actually a reality. In 2021, the wolf will likely be at the door.</p>
<p>The treasury predicts that revenue will be R1.1 trillion instead of R1.4 trillion – R300 billion less than projected in February this year. Proposed spending is now R40 billion more than in the February budget, although R7 billion of this is debt-service costs. The headline result is that the main budget deficit – the gap between government’s income and spending – will balloon to be 14.46% of gross domestic product instead of the planned 6.8%. </p>
<p>The government intends to cover part of that by borrowing about US$7 billion from multilateral institutions like the <a href="https://www.iol.co.za/news/politics/new-development-bank-provides-sa-with-1bn-covid-19-loan-49684714">New Development Bank</a> and the <a href="https://www.reuters.com/article/us-health-coronavirus-safrica/south-africa-says-over-4-billion-available-from-imf-world-bank-to-fight-covid-19-idUSKCN2261ZE">International Monetary Fund</a>. But that will finance less than half of the R344 billion increase in the borrowing requirements. This means more conventional borrowing at a time when the costs of doing so, after <a href="https://www.businesslive.co.za/bd/opinion/2020-04-07-sa-can-move-from-junk-status-to-comeback-kid-by-doing-the-right-things/">recent credit downgrades</a>, are high.</p>
<p>The scale of the changes renders the country’s annual budget tabled in February redundant by normal standards, along with much of parliament’s interrogation of those proposals in subsequent months. From the onset of the lockdown it was clear that this would be the case. So parliament could, and should, have played a more proactive role by, for example, facilitating public engagement with the treasury on fiscal options for responding to the effects of the pandemic and lockdown.</p>
<p>The legislature’s lacklustre approach will mean that, <a href="https://theconversation.com/south-africa-needs-a-functioning-parliamentary-budget-office-nows-the-time-to-fix-it-117555">as has been the case in non-crisis periods</a>, the minister’s proposals will almost certainly be rubber-stamped with no substantive public consultation or influence. And that is particularly egregious given the serious implications for all South Africans of the dramatic worsening of the country’s finances since February. </p>
<h2>Lockdown froze economic activity</h2>
<p>The collapse in economic activity at the root of this is the result of both the pandemic itself and the government’s response. Fear of the virus and basic measures such as social distancing, travel restrictions and limits on gatherings would have had a significant impact on economic activity anyway. But the lockdown is arguably the larger factor. It stopped most economic activity by decree. And that is also why the government is now moving hastily <a href="https://www.reuters.com/article/us-health-coronavirus-safrica/south-african-president-says-lockdown-to-ease-from-june-1-idUSKBN2300PQ">to ease it</a>, even as the rate of new infections <a href="https://www.iol.co.za/news/south-africa/confirmed-covid-19-cases-in-sa-rise-to-111-796-with-103-more-deaths-49851343">increases</a>.</p>
<p>The budget indicates that R142 billion has been allocated to COVID-19 measures – approximately 9% of total spending. That includes a R41 billion increase in social grants, which is lower than the originally announced R50 billion. As indicated by the bigger picture, most of this is not new spending. About R110 billion comes from various forms of reallocation from other, previously planned government expenditure areas. The full details of how such re-allocations happen, and the possible consequences for public service delivery of the associated trade-offs, will likely only be available after the fact.</p>
<p>Reduced economic activity has meant reduced tax collection. The fall in revenue is worsened by tax relief measures to cushion businesses and employees from the effect of the lockdown restrictions and broader economic downturn. The bigger consequence of this is that the ratio of national debt to GDP, which was already unprecedentedly high and repeatedly above targets, will increase to 81.8% instead of 65.6%. The treasury states its intention to get this under control through a series of measures that will be announced in the medium-term budget policy statement in October and the 2021 budget.</p>
<p>One dimension of those proposals will seek to raise an extra R40 billion of tax revenue. Strangely, however, the adjusted budget includes no proposals to increase taxes on the minority of individuals who will maintain high, stable incomes in the current year. </p>
<p>So despite rhetoric that sacrifices will need to be made, there appears to be little appetite to increase the contributions to government’s efforts from the most well-off in society during the pandemic. This group includes the politicians and officials making these decisions.</p>
<h2>Debt crisis looms</h2>
<p>The budget proposals seek to emphasise the need for future, drastic action with projections showing that national debt under a scenario of “public finance as usual” will increase to 106% of GDP over the next few years. </p>
<p>Historical precedent suggests that the chances of a developing country avoiding a debt crisis at that level of debt for any sustained period of time are very low. </p>
<p>However, there were already few substantive ideas for changing the pre-pandemic outlook. It’s therefore doubtful that the treasury has the ability to come up with ideas in the face of an even more dire situation. There has been a great deal of talk about the need for “structural reforms”. But those that have been placed on the table <a href="https://theconversation.com/budget-shows-treasury-is-desperately-short-of-ideas-to-fix-south-africas-economic-woes-132544">don’t hold up to close scrutiny</a>. Instead, they are simply the most recent manifestation of a view that privatisation of various kinds is some kind of panacea for state failure.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/budget-shows-treasury-is-desperately-short-of-ideas-to-fix-south-africas-economic-woes-132544">Budget shows treasury is desperately short of ideas to fix South Africa's economic woes</a>
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</em>
</p>
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<p>In reality, the kinds of sweeping governmental, social and economic changes required to change the country’s trajectory have for some time been outside the scope of what a treasury should, or is capable of, determining. South Africa has not come to terms with that and so there is little ability to conceive of alternative approaches, never mind adopt them.</p><img src="https://counter.theconversation.com/content/141478/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Seán Mfundza Muller receives funding from a European Union-funded project, "Putting People back in Parliament", led by the Dullah Omar Institute (University of the Western Cape), in collaboration with the Parliamentary Monitoring Group, Public Service Accountability Monitor (Rhodes) and Heinrich Boell Foundation (South Africa). He also receives funding from the Council on Higher Education for research into the effects of recent higher education policy decisions. He is affiliated to the Johannesburg Institute for Advanced Study and the Public and Environmental Economics Research Centre (University of Johannesburg), regularly making inputs to Parliament oversight of the national budget, advising civil society groups on public finance matters and consulting for private sector organisations on an ad hoc basis. The views expressed are his own.</span></em></p>National Treasury is incapable of coming up with the sweeping governmental, social and economic changes required to dig South Africa out of its economic hole.Seán Mfundza Muller, Senior Lecturer in Economics, Research Associate at the Public and Environmental Economics Research Centre (PEERC) and Visiting Fellow at the Johannesburg Institute of Advanced Study (JIAS), University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1414582020-06-25T13:41:07Z2020-06-25T13:41:07ZSouth Africa’s budget to deal with COVID-19 fails to pave way for more equal society<figure><img src="https://images.theconversation.com/files/343982/original/file-20200625-33546-evvo1w.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Does the budget tabled by Finance Minister Tito Mboweni (right) speak to President Cyril Ramaphosa's (left) vision of the new economy?</span> <span class="attribution"><span class="source">Getty Images</span></span></figcaption></figure><p>The COVID-19 pandemic has not only generated a far-reaching social and economic crisis in South Africa, but is also exposing two major fault lines in the society. </p>
<p>First, the pandemic has starkly exposed the country’s high levels of inequality. Every way in which South Africa is unequal has been exacerbated by the pandemic. Those with high-paying office jobs have largely been able to work and earn an income from their homes. Those in low-paying, precarious work have lost their jobs and income, or have been forced out to work. These same workers have to risk infection on public transport and in crowded shops. Children at private schools continue learning online, while the vast majority of learners in the public system have not had any schooling for almost three months. </p>
<p>Second, the pandemic has exposed the deep gender inequalities in the country. Not only has South Africa continued to experience the most abhorrent forms of gender-based violence under the lockdown, but the pandemic has also exposed the deep gender-based inequality in both paid and unpaid work. Women are having to bear a disproportionate responsibility for unpaid care work, while at the same time <a href="https://theconversation.com/south-africa-needs-to-focus-urgently-on-how-covid-19-will-reshape-its-labour-market-141137">bearing a heavy burden for job</a> and income losses in both the formal and informal economies.</p>
<p>Any economic policy proposals from government would have to address these inequalities if the country were to emerge from the pandemic with a more equal and fair society, and a more resilient economy. The budget is one of the key tools that government has to effect meaningful change, though it can’t address all these problems on its own. Of course, the rebuilding is a long-term process, but the budget is a key starting point.</p>
<p>In many of its pronouncements on managing the economic fallout from the pandemic, the government has emphasised its intention to forge a new economic growth path that would address the high levels of inequality in South Africa. Indeed, in a recent speech President Cyril Ramaphosa outlined <a href="https://www.dailymaverick.co.za/article/2020-05-31-ramaphosa-outlines-plans-for-a-new-economy/">his vision for a new economy</a> thus:</p>
<blockquote>
<p>We must transform and restructure. We are operating under an economy both colonial and racist. We need a reset of the economy for inclusive growth. We need an economy that responds to poverty. We can’t countenance 10 million people out of work.</p>
</blockquote>
<p>How does the <a href="http://www.treasury.gov.za/documents/national%20budget/2020S/speech/speech.pdf">supplementary budget</a> announced by Finance Minister Tito Mboweni move South Africa towards this objective? And what can be learnt from the budget about government’s plans to seriously work towards such a new economy? </p>
<p>To be fair, it is not the sole job of the finance minister to address inequality. However, the budget of the government, which is his responsibility, should provide a strategic financial framework for prioritising the key objectives of government. Sadly, we are of the view that there is very little in the budget he set out this week that creates a pathway to a better, more equal economy. </p>
<h2>Balancing competing imperatives</h2>
<p>We don’t deny that the financial and fiscal challenges which face South Africa are immense. There are no simple solutions. However, the budget needs to balance competing and sometimes incompatible imperatives: </p>
<ul>
<li><p>spending which protects and assists the poor and vulnerable; </p></li>
<li><p>financial management which allows the country to raise debt affordably and repay it sustainably; and </p></li>
<li><p>spending which promotes equitable growth. </p></li>
</ul>
<p>In addition, the budget should indicate how the fiscal consolidation plan will address the major inequalities in the country. It should also show how the adjustment will affect the country’s ability to address key social and economic challenges, in both the short and the long term. </p>
<p>There are three main messages in the <a href="http://www.treasury.gov.za/documents/national%20budget/2020S/default.aspx">supplementary budget</a>. </p>
<p>First, the narrower measure of the budget deficit for 2020/21 has, as a result of COVID-19, shifted from 6.8% of the gross domestic product (GDP) to 14.6% of GDP. Government had, in the original 2020/21 budget, projected its revenue for the fiscal year to be R1.398 trillion. As a result of the shutdown and lower economic growth, government now expects revenue to be <a href="http://www.treasury.gov.za/documents/national%20budget/2020S/review/Chapter%204.pdf#page=7">R1.099 trillion</a> – a shortfall of almost R300 billion. <a href="http://www.treasury.gov.za/documents/national%20budget/2020S/review/Chapter%204.pdf#page=7">Expenditure</a>, on the other hand, which was initially projected at R1.766 trillion, is now projected to be R1.809 trillion – an increase of about R44 billion. The net result is that the deficit, originally expected to be R368 billion, is now estimated to be R709 billion.</p>
<p>Second, within the current fiscal year, government has cut R101 billion from various budget lines, and <a href="http://www.treasury.gov.za/documents/national%20budget/2020S/review/Chapter%202.pdf#page=2">reallocated R145 billion</a> worth of expenditure for COVID-19 measures – hence the R44 billion of net additional expenditure. </p>
<p>Third and most strikingly, government plans to have <a href="http://www.treasury.gov.za/documents/national%20budget/2020S/review/Chapter%204.pdf#page=2">a primary budget surplus</a> (that is, the difference between revenue and expenditure before debt payments) by 2023/24, in order to deal with its growing debt. </p>
<p>This raises two important questions. The first is why it is necessary at all to have a primary surplus in the budget. An obsession with balanced budgets dates back to <a href="https://www.ft.com/content/f07583a0-adb1-11e2-a2c7-00144feabdc0">the Thatcher/Reagan era of the 1980s</a>. But there are many compelling arguments for why it is not necessary for a government ever to run a balanced budget. The austerity measures required to balance a budget can inflict permanent economic damage on the poorest and most vulnerable citizens, and deepen inequality. </p>
<p>Second, how will this surplus will be achieved, and at what cost, to whom? The indications are that the budget will be balanced through significant cuts in expenditure (rather than rapid revenue growth), projected at R230 billion in 2021/22 and 2022/23, and even further in 2023/24. Unfortunately, we are not provided with details on where these cuts in expenditure will occur. But there is little doubt that they will disproportionately affect those dependent on state services.</p>
<p>There is little in the 2020 adjustment budget to suggest that the government is serious about building a fairer economy which addresses the already high levels of inequality. Essentially, we have been told to wait until the October mid-term budget, and the 2021 annual budget, to see the detail about how the government will achieve its goals. </p>
<h2>The fallout</h2>
<p>On the basis of what has been said (and not said) in the supplementary budget, we can expect inequality to rise significantly. Government expenditure is progressive and significantly reduces the levels of inequality in our society. Cutting expenditure at the magnitude planned will certainly lead to higher levels of inequality. Moreover, because of the nature of social spending, the impact of spending cuts will fall disproportionately on women.</p>
<p>There are two very worrying aspects of the desire to run a budget surplus. The first is that spending cuts required to achieve it are extreme, and contrary to the expansionary fiscal policy being adopted by many countries around the world. The second is that there is little information in the adjustment budget about who will bear the brunt of these cuts. This matters for inequality. </p>
<p>If government is serious about addressing inequality and building a less unequal economy, what should the budget do? Inequality cannot be addressed without an active economic strategy that:</p>
<ul>
<li><p>Uses the budget to change the distribution of the incomes arising out of economic activity by increasing expenditure targeted at low income groups. This can be done by either increasing total expenditure, or by re-prioritising expenditure to low income groups so that they benefit more than they presently do,</p></li>
<li><p>Increases the level of taxation on the wealthy and uses the proceeds for more effective targeting of expenditure,</p></li>
<li><p>Uses the economic tools at its disposal to alter the outcome of earnings and rents earned through economic activity by increasing the incomes of low income groups, through, for example, increasing levels of employment, providing better support to the unemployed, and raising the level of wages. This would require budget allocations to realise any such plans.</p></li>
</ul>
<p>There is, unfortunately, very little in this supplementary budget to suggest that government has an economic strategy to lower inequality in South Africa.</p><img src="https://counter.theconversation.com/content/141458/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>David Francis works at the Southern Centre for Inequality Studies which receives funding from international foundations that fund research.</span></em></p><p class="fine-print"><em><span>Imraan Valodia receives funding from a number of local and international organizations that support research.</span></em></p>The budget is one of the key tools that government has to effect meaningful change.David Francis, Deputy Director at the Southern Centre for Inequality Studies, University of the WitwatersrandImraan Valodia, Dean of the Faculty of Commerce, Law and Management, and Head of the Southern Centre for Inequality Studies, University of the WitwatersrandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1368652020-05-08T03:18:43Z2020-05-08T03:18:43ZIndonesia’s government bonds to fight off COVID-19 will burden future generations<figure><img src="https://images.theconversation.com/files/332586/original/file-20200505-83725-fz04io.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://flickr.com/photos/143106192@N03/42655398685/in/photolist-27Zj4Wn-5FVBNe-McgoKS-LDNmPX-biZ3u-bZvWNs-TqZgSa-N4Guan-5S2X3-HhhcFy-gdzcq-9Eh9R1-5RAUKG-J4wvHq-HGGB1U-8aAXZ6-8aAXZ4-8aAXZ8-8aDKd5-HhhbYG-5sA6WR-8aAMNR-8aXxcE-8azQTR-8aDKd9-8azQU4-8azQTF-8bafHS-8aE913-8aAMNx-dSzPuE-8aXxcQ-8aAzvn-8aAzv8-8aAzvp-Janx9N-8aAMNn-8aAMND-8aAMNT-8aE8ZQ-8azQT2-8bafKW-8aE8ZY-8azQTc-8aAMNz-5sA6WD-QwkS5z-UBC7w2-QQYg-QQG3">mikecohen/flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>Countries around the world are struggling to finance the battle with the COVID-19 pandemic, which has also hurt their economies. </p>
<p>This includes Indonesia, which has decided to issue government bonds to finance a stimulus package to counter the impacts of COVID-19. </p>
<p>There are actually two options to fund the stimulus: taxation or loans. But taxation can’t provide a huge amount of cash in a short time, so the government is issuing the <a href="https://www.thejakartapost.com/news/2020/04/08/government-debt-issuance-to-triple-to-62b-as-indonesia-fights-covid-19.html">first 50-year dollar bond sale</a> by an Asian country. Worth US$1 billion, the 50-year bond issue is part of the US$4.3 billion multi-part debt offering.</p>
<p>A <a href="https://www.theguardian.com/world/2016/aug/13/what-are-government-bonds">government bond</a> is simply a kind of loan from investors to a government. The government promises to pay the buyer small cash payments, called coupons, which are set at a fixed rate until the bond matures.</p>
<p>Due to the long-term nature of this debt, I argue that the debt will create a burden for the next generation. And, if not well managed, it can create a debt crisis in <a href="https://www.axios.com/debt-crisis-awaits-emerging-markets-a83e9c0a-3a0d-4690-8ca7-ae064f0c6f8f.html">the future</a>. </p>
<p>Nevertheless, there should be forward thinking about containing the COVID-19 disruptions to the economy and funding solutions. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/333589/original/file-20200508-49556-1vy3j4q.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/333589/original/file-20200508-49556-1vy3j4q.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=401&fit=crop&dpr=1 600w, https://images.theconversation.com/files/333589/original/file-20200508-49556-1vy3j4q.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=401&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/333589/original/file-20200508-49556-1vy3j4q.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=401&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/333589/original/file-20200508-49556-1vy3j4q.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/333589/original/file-20200508-49556-1vy3j4q.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/333589/original/file-20200508-49556-1vy3j4q.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="attribution"><a class="source" href="https://flickr.com/photos/cafecredit/27673034866/in/photolist-Janx9N-8aAMND-8aAMNT-8aE8ZQ-8azQT2-8bafKW-8aE8ZY-8azQTc-8aAMNz-5sA6WD-QwkS5z-UBC7w2-QQYg-Zm1ZEZ-3irZjD-21G9Q6k-7fNUg1-GB4Aph-MK4Pa7-5Sb9JA-pY6H6n-opupcx-KcmcBc-6g8qJM-2hQbonm-54KKuW-2hQdAgi-2hQbP5i-2hPmQ3q-2hPPFnw-QQG3-4qBDH-2xNWp-n2sg6-aUDBTz-GG1QeV-9xpJs4-9piLnz-Hxih-m888or-MexN2C-TsjHuA-4TrPFm-kT4Ksw-9Ktb6e-6gj36L-6gcAAw-4NKZnb-8rZbx8-5CD8pq">cafecredit/flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<h2>How the debt will be bad for future generations</h2>
<p>The government’s recent bonds will be burdensome for Indonesia’s future generations for at least two reasons.</p>
<p><strong>1.</strong> <strong>It is a very long-term bond</strong></p>
<p>The duration of the Indonesian government bond is ten times that of the recently launched Australian government bond, which has a maturity of <a href="https://www.afr.com/markets/debt-markets/government-debt-agency-breaks-bond-record-with-13bn-sale-20200415-p54jy5">less than five years</a>. </p>
<p>A consequence of this long term is that it’s a moderate-to-high-risk bond and will likely be affected by interest rates. </p>
<p>The price of the bonds will be affected by the interest rates set up by central banks, especially the US Federal Reserve. </p>
<p>In a recession, like the current situation, the Federal Reserve sets a relatively low interest rate, making an investment in bonds more attractive. But, in a normal situation, the Federal Reserve may set a higher interest rate. </p>
<p>Therefore, bonds with a 50-year maturity will create uncertainty for bonds whose values are affected by the Federal Reserve’s interest rates. </p>
<p><strong>2.</strong> <strong>It is in foreign currency</strong></p>
<p>The Indonesian government bond is using the US dollar. Given that the Indonesian rupiah is weak against the US dollar, there is likely a high currency-related risk. The fluctuation of the rupiah will influence the value of the loans the government has to repay in the future.</p>
<p>The majority of Indonesian government bond buyers are global investors, particularly from Europe and Singapore. </p>
<p>Paying interest and repaying the debt <a href="https://www.etfstream.com/feature/10771_emerging-market-debt-to-hold-or-not-to-hold/">will be more challenging</a> with global investors than with local investors if the government is not be able to repay the debt due to foreign currency risk and the weakness of rupiah compared to US dollars.</p>
<h2>Misleading numbers</h2>
<p>The Ministry of Finance justifies this long-term sovereign bond because Indonesia has low ratio of debt to gross domestic product at <a href="https://www.ceicdata.com/en/indicator/indonesia/government-debt--of-nominal-gdp">30.2%</a>. </p>
<p>That figure is much lower than for many other countries in the world such as Malaysia
(<a href="https://tradingeconomics.com/country-list/government-debt-to-gdp?continent=asia">52.5%</a>) or the United Kingdom (<a href="https://tradingeconomics.com/country-list/government-debt-to-gdp?continent=europe">80%</a>). </p>
<p><a href="https://data.oecd.org/gga/general-government-debt.htm">This ratio</a> is the gross debt of the government as a percentage of gross domestic product, according to the Organisation for Economic Co-operation and Development. When government debt is high relative to gross domestic product, this indicates a country will have to pay back the debt through creating another debt. </p>
<p>Adding more bonds will contribute to the increase in the government deficit from <a href="https://www.thejakartapost.com/news/2020/04/27/indonesia-to-maintain-debt-sustainability-despite-covid-19-relief-spending-adb.html">3% to 5%</a> of Indonesia’s GDP. As a percentage, the deficit looks small, but in terms of the amount it’s a huge number as it could reach up to <a href="https://www.thejakartapost.com/news/2020/04/08/government-debt-issuance-to-triple-to-62b-as-indonesia-fights-covid-19.html">US$61.5 billion (equal to Rp 1 quadrillion) this year</a>. That’s a jump of 286% from the initial target of Rp 351.9 billion.</p>
<p>This huge number will be a burden for Indonesian generations 50 years from now. </p>
<p>At the end of the day, taxpayers will pay for the stimulus package. That’s you, your children, or even your grandchildren. </p>
<p>On top of that, systemic corruption in local government in many provinces is another challenge to making sure the money goes to the right recipients. </p>
<h2>A better strategy to repay sovereign long-term debt</h2>
<p>There are several ways to manage the large burden of government debt due to COVID-19. </p>
<p>First, the Ministry of Finance with the Financial Services Authority and Bank Indonesia should propose a strategy to repay the debt within 10-15 years. </p>
<p>The current situation is forcing governments around the world to borrow money through issuing debt recklessly. Therefore, governments will have to collaborate to repay the debt before it creates <a href="https://www.economist.com/leaders/2020/04/23/after-the-disease-the-debt">future disasters to the economy in the long term</a>.</p>
<p>Second,transparency is essential. </p>
<p>Ideally, every month the Ministry of Finance, Ministry of Health and local government should report on the spending of every penny from the debt to the public. </p>
<p>For instance, <a href="https://www.economist.com/europe/2020/04/25/germany-excels-among-its-european-peers">Germany can manage COVID-19 better</a> than other European countries due to collaboration between its ministries. </p>
<p>Third, the government should raise taxes for the richest group in Indonesia. This would be similar to developed countries such as <a href="https://fortune.com/2018/12/05/france-tax-oecd/">France</a>, which is able to generate tax revenue equal to 46.2% of its economic output.</p>
<p>The Indonesian government is quite lenient with the rich. Indonesian millionaires account for only <a href="https://jakartaglobe.id/business/0-1-percenter-millionaire-households-control-half-indonesias-wealth/">0.1% of the population but hold half of Indonesia’s wealth</a>. </p>
<p>The burden of repaying the debt should be shifted more to this group.</p>
<p>Fourth, we should not spend all the funds from the debt on medical equipment and dampening the effects of the pandemic on the economy.</p>
<p>President Joko “Jokowi” Widodo should allocate at least 20% of the budget to build health factories producing ventilators, respirators and other health infrastructure. </p>
<p>It will also help to ask local manufacturers to collaborate with the government. </p>
<p>The procurement of medical equipment is very important, as we will be battling <a href="https://www.nbcnews.com/health/health-news/social-distancing-may-remain-place-until-2022-harvard-researchers-say-n1184396">the virus until 2022</a>, plus there is no certainty on <a href="https://www.theguardian.com/australia-news/2020/apr/21/no-guarantee-coronavirus-vaccine-will-be-found-soon-infectious-disease-expert-tells-qa">when a vaccine will be found</a>.</p>
<p>We need to prioritise tackling the health crisis first over the economy.</p><img src="https://counter.theconversation.com/content/136865/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Nurhastuty K. Wardhani tidak bekerja, menjadi konsultan, memiliki saham, atau menerima dana dari perusahaan atau organisasi mana pun yang akan mengambil untung dari artikel ini, dan telah mengungkapkan bahwa ia tidak memiliki afiliasi selain yang telah disebut di atas.</span></em></p>A large part of the debt the Indonesian government is taking on to fight the COVID-19 pandemic is as a 50-year loan in US dollars. That could create a big problem in coming decades.Nurhastuty K. Wardhani, Junior Lecturer, Trisakti UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1239282019-09-20T08:17:39Z2019-09-20T08:17:39ZVIDEO: Michelle Grattan on the family law inquiry - and the UN climate change summit<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/_C66gJ1J6cg?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
</figure>
<p>University of Canberra Deputy Vice-Chancellor Leigh Sullivan discusses Scott Morrison’s new family law inquiry with Michelle Grattan. They also speak of the developments in the Tamil family from Biloela’s case, and the UN barring Australia from speaking at the upcoming climate change summit.</p><img src="https://counter.theconversation.com/content/123928/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michelle Grattan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Michelle Grattan discusses the government’s new family law inquiry, and Australia being banned from the speaking list at the upcoming UN climate change summit.Michelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1153762019-04-15T20:15:24Z2019-04-15T20:15:24ZMemories. In 1961 Labor promised to boost the deficit to fight unemployment. The promise won<figure><img src="https://images.theconversation.com/files/269257/original/file-20190415-147525-1tx2vbv.jpg?ixlib=rb-1.1.0&rect=128%2C159%2C815%2C515&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Arthur Caldwell almost defeated Robert Menzies in the poll in 1961, and won the debate about policy.</span> <span class="attribution"><a class="source" href="https://commons.wikimedia.org/wiki/File:Arthur_Calwell_1966.jpg">National Archives, National Library of Australia, Wikimedia</a></span></figcaption></figure><p>Lately, governments and oppositions have been obsessed with “returning to surplus” in order to balance the budget. </p>
<p>It hasn’t always been so. In the lead-up to the 1961 federal election, unemployment had climbed above 2% and was creeping towards 3%. (By today’s standards that doesn’t sound much, but for two decades since the onset of the second world war unemployment had been mostly <a href="https://melbourneinstitute.unimelb.edu.au/downloads/working_paper_series/wp1997n24.pdf">well below 2%</a>.)</p>
<p>The Labor opposition, led by Arthur Calwell, went to the 1961 election <a href="https://electionspeeches.moadoph.gov.au/speeches/1961-arthur-calwell">promising</a> that:</p>
<blockquote>
<p>Labor will restore full employment within 12 months, and will introduce a supplementary budget in February for a deficit of £100 million, if necessary, to achieve this.</p>
</blockquote>
<p>From the end of World War II, there had been a bipartisan commitment to full employment in Australia. As laid out in the Curtin government’s 1945 White Paper, <a href="http://www.billmitchell.org/White_Paper_1945/index.html">Full Employment in Australia</a>, this was achieved by “stimulating spending on goods and services to the extent necessary to sustain full employment”.</p>
<p>The strongly held view, developed primarily by British economist John Maynard Keynes during the Great Depression, was that government could, and should, use its spending power to fill any gap left by private expenditure, ensuring there was always enough spending to keep operating near (but not above) capacity.</p>
<h2>Spending stopped unemployment</h2>
<p>The 25 years after World War II in which this happened are often referred to as the “postwar boom” because times were so good. This period had rapid economic growth, steadily improving material standards of living (for most), and falling inequality.</p>
<p>Involuntary unemployment was scarcely heard of. “Long-term unemployment” didn’t exist as a statistical category.</p>
<p>By focusing on keeping the Australian economy at or near full capacity and investing heavily in infrastructure, research and education to improve productivity, the postwar governments of both major parties were able to do what these days would be thought impossible: to run constant government deficits while overseeing a dramatic fall in the ratio of government debt to gross domestic product.</p>
<hr>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/269248/original/file-20190415-147487-1yz9fu0.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/269248/original/file-20190415-147487-1yz9fu0.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/269248/original/file-20190415-147487-1yz9fu0.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=289&fit=crop&dpr=1 600w, https://images.theconversation.com/files/269248/original/file-20190415-147487-1yz9fu0.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=289&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/269248/original/file-20190415-147487-1yz9fu0.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=289&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/269248/original/file-20190415-147487-1yz9fu0.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=363&fit=crop&dpr=1 754w, https://images.theconversation.com/files/269248/original/file-20190415-147487-1yz9fu0.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=363&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/269248/original/file-20190415-147487-1yz9fu0.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=363&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://assets.documentcloud.org/documents/1688260/centric-wealth-debts-and-deficit-table.pdf">Source: Australian Federal Government deficits, debt and the stock market, Centric Wealth</a></span>
</figcaption>
</figure>
<hr>
<p>What’s important to understand is that the postwar boom occurred, at least in part, because of the budget deficits, not in spite of them. </p>
<p>By always spending enough to maintain the economy at full employment, the government ensured a strong economy. Economic growth made the ratio of debt to gross domestic product shrink.</p>
<p>All of this was very much part of the public conversation back in the 1940s, 1950s and 1960s. Very little attention was given to the budget balance, with people instead focused on the level of unemployment. On the rare occasions the budget balance was mentioned, it was often in the context of pushing for greater deficits to reduce unemployment.</p>
<h2>Calwell won the fight, if not the election</h2>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/269259/original/file-20190415-147518-1nbzp67.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/269259/original/file-20190415-147518-1nbzp67.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/269259/original/file-20190415-147518-1nbzp67.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=840&fit=crop&dpr=1 600w, https://images.theconversation.com/files/269259/original/file-20190415-147518-1nbzp67.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=840&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/269259/original/file-20190415-147518-1nbzp67.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=840&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/269259/original/file-20190415-147518-1nbzp67.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1056&fit=crop&dpr=1 754w, https://images.theconversation.com/files/269259/original/file-20190415-147518-1nbzp67.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1056&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/269259/original/file-20190415-147518-1nbzp67.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1056&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">After the 1961 election Robert Menzies made Arthur Calwell’s policy his own.</span>
<span class="attribution"><a class="source" href="https://commons.wikimedia.org/wiki/File:Robert_Menzies_in_1939.jpg">National Library of Australia</a></span>
</figcaption>
</figure>
<p>Calwell’s Labor opposition didn’t win the 1961 election, but there was a massive swing towards it and the result was one of the closest in Australia’s history, decided by mere hundreds of votes. </p>
<p>The fact that unemployment had crept up towards 3% was a significant contributor to the Coalition losing 15 seats in the House of Representatives and control of the Senate.</p>
<p>Immediately after the election, to shore up his position, Menzies effectively adopted and extended Labor’s policy delivering a <a href="http://pmtranscripts.pmc.gov.au/sites/default/files/original/00000579_0.pdf">1962-63 budget</a> that focused squarely on full employment and brought down a deficit of £120 million, £20 million more than Labor had been proposing.</p>
<h2>The debt burden shrank as GDP climbed</h2>
<p>By the end of World War II, government debt was 120% of gross domestic product total. This means that total debt was 1.2 times the annual economic output of the country. By comparison, today’s federal government debt is about 18% of GDP, a mere one-fifth of annual economic output.</p>
<p>So, according to the modern political discourse on government debt, the postwar generations must have been terribly burdened by all of that debt, and governments must have had to show incredible fiscal discipline to pay it off, right?</p>
<p>The answer will surprise many who have fallen for the modern rhetoric. Although each loan was paid off as if came due, the total stock of debt didn’t shrink, but the economy grew strongly, allowing the debt-to-GDP ratio to wither to the point at which it approached zero.</p>
<hr>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/269262/original/file-20190415-147483-1g2uppy.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/269262/original/file-20190415-147483-1g2uppy.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/269262/original/file-20190415-147483-1g2uppy.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=274&fit=crop&dpr=1 600w, https://images.theconversation.com/files/269262/original/file-20190415-147483-1g2uppy.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=274&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/269262/original/file-20190415-147483-1g2uppy.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=274&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/269262/original/file-20190415-147483-1g2uppy.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=344&fit=crop&dpr=1 754w, https://images.theconversation.com/files/269262/original/file-20190415-147483-1g2uppy.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=344&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/269262/original/file-20190415-147483-1g2uppy.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=344&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://static.treasury.gov.au/uploads/sites/1/2017/06/01_Public_Debt.pdf">Commonwealth Treasury</a></span>
</figcaption>
</figure>
<hr>
<p>Australia’s budget history is one of modest deficits leavened with occasional larger deficits and occasional surpluses. It’s been entirely sustainable.</p>
<p>Our postwar governments lived by Keynes’s dictum:</p>
<blockquote>
<p>Look after the unemployment and the budget will look after itself.</p>
</blockquote>
<p>The economy has changed a lot since then and we can’t simply copy the policies that worked for Curtin, Chifley and Menzies.</p>
<p>But we can learn from them. The reality is that we don’t know how low unemployment could fall in modern Australia because we haven’t made any genuine attempt to push it below 5% for decades.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/explainer-what-is-modern-monetary-theory-72095">Explainer: what is modern monetary theory?</a>
</strong>
</em>
</p>
<hr>
<p>A modern-day policy commitment to full employment, along lines inspired by what we did after the war, could lift wages, reduce inequality, drive increases in productivity and, most importantly, provide full employment for the more than two million Australians who are currently unemployed, underemployed or discouraged attempting to get work.</p>
<p>Treasurer Chifley summed up the goal this way <a href="https://www.cambridge.org/core/books/cambridge-economic-history-of-australia/evolution-of-australian-macroeconomic-strategy-since-world-war-2/26E619FAE86CF964979D87832A1E5B89">in 1944</a>:</p>
<blockquote>
<p>Our objective is not primarily social security, but rather the much higher objective of full employment of manpower and resources in raising living standards.</p>
</blockquote><img src="https://counter.theconversation.com/content/115376/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Warwick Smith works part-time for Per Capita, a public policy think tank that receives money from philanthropic trusts, the National Union of Workers, the Community and Public Sector Union and the Australian Services Union.</span></em></p>History suggests we can run sizable budget deficits while shrinking the budget debt burden. Mid last century our leaders weren’t afraid to say so.Warwick Smith, Research economist, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1118052019-02-14T16:36:29Z2019-02-14T16:36:29ZWhy the $22 trillion national debt doesn’t matter – here’s what you should worry about instead<figure><img src="https://images.theconversation.com/files/259057/original/file-20190214-1736-1x1fdrt.gif?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Does a few more trillion make a difference?</span> <span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Federal-Reserve-Yellen/2a55cf1bb5d049a2b50fe864396f62e9/5/0">AP Photo/Manuel Balce Ceneta</a></span></figcaption></figure><p>The U.S. federal government’s debt load hit <a href="https://www.npr.org/2019/02/13/694199256/u-s-national-debt-hits-22-trillion-a-new-record-thats-predicted-to-fall">another milestone</a> this month: It’s now a <a href="http://www.treasurydirect.gov/NP/debt/current">record US$22 trillion</a> in nominal terms. </p>
<p>That’s <a href="http://www.usdebtclock.org">$67,000 for every man, woman and child</a> living in the U.S., and it’s up $2 trillion since President Donald Trump took office in 2017. For comparison, U.S. debt is more than the total size of the United States’ $20 trillion economy and equivalent to the <a href="https://www.investopedia.com/insights/worlds-top-economies/">gross domestic products of China, Japan and Germany combined</a>. </p>
<p>This hefty sum is a reflection of the <a href="https://www.whitehouse.gov/omb/historical-tables/">large annual budget deficits</a> that the federal government has run, pretty much continuously, since 1931. Prior to that, surpluses were much more common, apart from the years following the Civil War. </p>
<p>With another round of <a href="https://www.bloomberg.com/news/articles/2019-01-09/protracted-debt-limit-battle-poses-risks-to-u-s-credit-standing">anxiety-causing debt-ceiling debates</a> likely to return in the coming months, like other <a href="https://www.foreignaffairs.com/articles/2019-01-27/whos-afraid-budget-deficits">economists</a>, <a href="https://scholar.google.com/citations?user=V8nHvIYAAAAJ&hl=en&oi=ao">I</a> believe it is worth asking whether we should even care about the size of government debt. </p>
<h2>Default isn’t imminent</h2>
<p>First of all, it’s important to note current U.S. debt levels do not indicate any risk of imminent default.</p>
<p>As long as the U.S. federal government remains an “ongoing concern” – fiscal institutions are strong and effective, taxing authority is maintained and the long-run productive capacity of the nation’s economy is secure – there is no economic reason to fear default on the nation’s debt. Political reasons, such as <a href="https://www.nbcnews.com/business/economy/what-debt-ceiling-why-congress-fighting-about-it-n796556">debt-ceiling mischief</a>, are another matter. </p>
<p>To remain solvent and ultimately pay what it owes, the U.S. Treasury – which sells notes and bonds to investors to raise money to finance the budget deficit – needs only to balance its books over the long run, rather than over an arbitrary unit of time like a year. </p>
<p><a href="http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/Historic-LongTerm-Rate-Data-Visualization.aspx">Historically low interest rates</a> on government debt suggest that bond market participants agree with this view and are not afraid of a sovereign debt default in the U.S. Indeed, with these low rates, sufficient economic growth can allow the government to <a href="https://www.aeaweb.org/aea/2019conference/program/pdf/14020_paper_etZgfbDr.pdf">borrow indefinitely</a>.</p>
<h2>Why it’s irrelevant</h2>
<p>Although $22 trillion is a large number, it is essentially irrelevant to proper thinking about the economic role of the U.S. government or about responsible fiscal policy. </p>
<p>Government debt simply reflects the timing of taxes. Higher spending levels today require more borrowing – and a larger debt – as long as the taxes needed to pay for those expenditures are pushed into the future.</p>
<p>But regardless of when taxes are collected, what ultimately matters is the quantity of the economy’s scarce resources the federal government commands and controls, and how those resources are used, which essentially depend on the level and composition of government spending. To paraphrase Milton Friedman, <a href="https://www.realclearpolicy.com/articles/2012/12/18/remember_milton_friedman_spending_is_taxing_382.html">spending is taxing</a>. </p>
<p>In short, government debt can be a bad indicator of the stance of fiscal policy or its burden on the private sector. The government can be wildly intrusive in the economy and thus a hindrance to growth and welfare even if its debt is low. For example, Venezuela’s <a href="https://tradingeconomics.com/venezuela/government-debt-to-gdp">sovereign debt</a> was only 23 percent of its GDP in 2017, yet its economy <a href="https://tradingeconomics.com/venezuela/gdp-growth-annual">has been in turmoil</a> for several years.</p>
<p>Or it can effectively manage spending to promote welfare even if its debt is high. In 1945, the U.S. <a href="https://fred.stlouisfed.org/series/GFDGDPA188S">debt-to-GDP</a> ratio was 120 percent, immediately after the government mobilized the economy to win World War II. </p>
<p>High debt should not prevent the government from spending on worthwhile public endeavors. And low debt does not prove that the level or composition of government spending is appropriate.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/258884/original/file-20190213-181597-lx7pqe.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/258884/original/file-20190213-181597-lx7pqe.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=381&fit=crop&dpr=1 600w, https://images.theconversation.com/files/258884/original/file-20190213-181597-lx7pqe.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=381&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/258884/original/file-20190213-181597-lx7pqe.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=381&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/258884/original/file-20190213-181597-lx7pqe.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=478&fit=crop&dpr=1 754w, https://images.theconversation.com/files/258884/original/file-20190213-181597-lx7pqe.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=478&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/258884/original/file-20190213-181597-lx7pqe.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=478&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Medicare makes up about a third of government liabilities considered ‘off balance sheet.’</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Medicare-New-Benefits/6fdf3d70076f48aba517f0efc4e3fe17/80/0">AP Photo/Pablo Martinez Monsivais</a></span>
</figcaption>
</figure>
<h2>The real burden to worry about</h2>
<p>Yet, the $22 trillion “on-balance-sheet” debt is likely to woefully underestimate the federal government’s true liabilities and its potential demand on the economy’s resources. </p>
<p>The national debt is the government’s formal commitment to repay its creditors. But Uncle Sam has many other commitments for future spending that are not on the books, so-called <a href="https://object.cato.org/sites/cato.org/files/serials/files/cato-papers-public-policy/2014/6/cppp-3-1.pdf">“off-balance-sheet” liabilities</a>. Such liabilities do not show up in standard debt measures.</p>
<p>While these commitments are different in nature from the promise to pay back previously borrowed funds, they are nonetheless a potentially large burden on taxpayers – and surely a governmental imposition on the economy.</p>
<p>These commitments arise from implicit and explicit <a href="https://www.nber.org/papers/w19253">federal loan guarantees that support housing and education policy</a>, from <a href="https://www.sciencedirect.com/science/article/pii/037842669190102R">deposit insurance</a> and <a href="https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm">Federal Reserve actions</a> that attempt to promote a stable financial system and from <a href="https://qz.com/111454/the-us-government-has-about-70-trillion-in-off-balance-sheet-liabilities/">commitments to the elderly and poor</a> through Social Security, pension guarantees and Medicare and Medicaid. </p>
<p>Economist Jim Hamilton has recently estimated that such off-balance-sheet liabilities could <a href="http://www.nber.org/papers/w19253">exceed $70 trillion</a>, more than three times the the current value of outstanding Treasury securities. The biggest share of that, or about a third, is Medicare. </p>
<p>So OK, worry about the debt, but pick the right measure to worry about.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/258880/original/file-20190213-181615-1q4e0yt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/258880/original/file-20190213-181615-1q4e0yt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=481&fit=crop&dpr=1 600w, https://images.theconversation.com/files/258880/original/file-20190213-181615-1q4e0yt.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=481&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/258880/original/file-20190213-181615-1q4e0yt.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=481&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/258880/original/file-20190213-181615-1q4e0yt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=604&fit=crop&dpr=1 754w, https://images.theconversation.com/files/258880/original/file-20190213-181615-1q4e0yt.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=604&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/258880/original/file-20190213-181615-1q4e0yt.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=604&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Buying Treasury bonds to finance government debt spending once was considered an act of patriotism.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Watchf-AP-A-NY-USA-APHS450129-Bond-Drive/3fcb5b838e41421399413f02e217d838/71/0">AP Photo/Charles Kenneth Lucas</a></span>
</figcaption>
</figure>
<h2>How to get a good night’s sleep</h2>
<p>But if excessive government debt burdens on future generations keep you up at night, there’s a simple solution: buy Treasury securities with the money saved from low current taxes and bequeath those securities to your kids. </p>
<p>They can use the principal and interest to pay off high future taxes, with no ultimate effect on their net wealth or well-being. </p>
<p>In other words, taxpayers can use capital markets to offset transfers of their wealth – via taxes – to bondholders by becoming bondholders themselves. In aggregate, as long as private saving rises with government borrowing – and it is plausible to assume that it will if people feel the need to save to pay higher future taxes – the latter need not crowd out borrowing for productive activity by the private sector. </p>
<p>And then worrying about the federal debt won’t keep you from a good night’s sleep. </p>
<p><em>This is an updated version of an <a href="https://theconversation.com/why-the-national-debt-doesnt-matter-or-how-i-learned-to-stop-worrying-and-love-treasuries-38775">article originally published</a> on March 19, 2015.</em></p><img src="https://counter.theconversation.com/content/111805/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>William D. Lastrapes does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Although US debt may be at eye-popping levels, an economist explains why it shouldn’t keep you up at night.William D. Lastrapes, Professor of Economics, University of GeorgiaLicensed as Creative Commons – attribution, no derivatives.