tag:theconversation.com,2011:/au/topics/structural-deficit-5365/articlesstructural deficit – The Conversation2020-06-11T17:51:00Ztag:theconversation.com,2011:article/1403062020-06-11T17:51:00Z2020-06-11T17:51:00Z99% of Ontario’s funding for community safety and well-being pads police budgets<p>In the aftermath of <a href="https://www.cbc.ca/news/canada/toronto/regis-korchinski-paquet-toronto-1.5593718">Regis Korchinski-Paquet’s tragic death</a>, Torontonians are asking their city councillors to <a href="https://www.cbc.ca/player/play/1745093699658">defund the Toronto Police Service</a>. But city council isn’t the only place to begin defunding the police; there’s also Queen’s Park.</p>
<p>While Toronto police’s budget is $1.07 billion, Ontario’s Ministry of the Solicitor General has made available another <a href="https://www.mcscs.jus.gov.on.ca/english/Policing/ProgramDevelopmentandGrants/GrantsandInitiatives/PSDPolicingGrantsRecipients2018.html">$200 million over four years in grants</a> to organizations across the province to support the provincial <a href="https://www.mcscs.jus.gov.on.ca/english/Publications/MCSCSSSOPlanningFramework.html#Section2">Community Safety and Well-being (CSWB) Strategy</a>. </p>
<p>Of this $200 million, 99 per cent ($199 million) goes directly to police forces on top of their annual budgets. City service providers and community organizations doing preventive work receive less than one per cent ($1.6 million).</p>
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<span class="caption">Breakdown of provincial grants available for safety and well-being.</span>
<span class="attribution"><span class="source">Data: Ministry of the Solicitor General</span></span>
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<h2>Rhetoric vs. reality</h2>
<p>The province’s policy recognizes that crime has systemic roots, prevention trumps enforcement and communities need other options when it comes to emergency response.</p>
<p>And yet, the spending patterns appear to contradict commitments to move away from “<a href="https://www.mcscs.jus.gov.on.ca/english/Publications/MCSCSSSOPlanningFramework.html#Section1">reactionary, incident-driven responses, refocusing investments towards the long-term benefits of social development and prevention</a>.” The province’s CSWB strategy acknowledges that many challenges, such as mental health crises, are better managed through a “<a href="https://www.mcscs.jus.gov.on.ca/english/Publications/MCSCSSSOPlanningFramework.html#Section1">collaborative service delivery model that leverages the strengths of partners in the community</a>,” instead of just the police. </p>
<p>That strategy is based on <a href="https://journalcswb.ca/index.php/cswb/article/view/38/74">academic research</a> that shows how investing in socio-economic development and addressing risk factors early can help reduce crime and violence. It is similar to public health planning, where <a href="https://pubmed.ncbi.nlm.nih.gov/22052182/">evidence consistently shows</a> that it is more effective and less expensive to address health issues before they result in a visit to the emergency room. But crime and violence command so much more political attention than the slow burn of poverty, structural violence and inequality.</p>
<h2>The 99 per cent</h2>
<p>In Toronto, the police received $55.4 million over four years (in addition to their billion-dollar budget). Only $360,775 was invested in organizations working to address the socio-economic roots of crime and violence in Toronto — that’s 0.7 per cent of the funding given to police. </p>
<p>To better understand what kinds of projects these provincial grants support in the Toronto police, I broke down the figures.</p>
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<a href="https://images.theconversation.com/files/341030/original/file-20200610-34678-14a5n0e.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/341030/original/file-20200610-34678-14a5n0e.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/341030/original/file-20200610-34678-14a5n0e.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=443&fit=crop&dpr=1 600w, https://images.theconversation.com/files/341030/original/file-20200610-34678-14a5n0e.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=443&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/341030/original/file-20200610-34678-14a5n0e.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=443&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/341030/original/file-20200610-34678-14a5n0e.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=557&fit=crop&dpr=1 754w, https://images.theconversation.com/files/341030/original/file-20200610-34678-14a5n0e.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=557&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/341030/original/file-20200610-34678-14a5n0e.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=557&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="caption">Breakdown of provincial community safety grants awarded to the Toronto Police Service.</span>
<span class="attribution"><span class="source">Data: Ministry of the Solicitor General</span></span>
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<p>The province committed nearly $3 million to purchase conducted energy weapons, also known as Tasers, noting that they are “an appropriate use of force option” and that they aim to “achieve a zero-death goal in encounters with the public.” In fact, Tasers have been known to cause <a href="https://www.cbc.ca/news/canada/new-brunswick/new-stun-gun-changes-studied-by-oversight-group-1.947044">serious bodily harm and death</a>. It’s also hard to understand how they are an investment in prevention or social development. </p>
<p>The $30 million Public Safety Response Team grant is similarly reaction-oriented, focusing on “extreme event response, public order and search management, and critical infrastructure protection.” While community and neighbourhood officers might play a preventive role, it is difficult to make a similar argument for mobile smart devices ($8.3 million) or IT improvement and robotic processes automation ($7.1 million). </p>
<p>Only six non-police organizations in Toronto dedicated to community safety and well-being received provincial funding, amounting to $360,775 over four years. <a href="https://margarets.ca/">Margaret’s Housing and Community Support Services</a> received just under $70,000 even though it serves people who are at risk of coming into contact with the police due to poverty, mental health or addictions issues. </p>
<p><a href="https://www.thestar.com/news/gta/2019/10/30/why-healthy-neighbourhoods-not-police-are-the-antidote-to-gun-crime.html">There are many organizations in the GTA working to address and prevent violence</a> in their own communities with very little funding, like the <a href="http://zerogunviolence-movement.com/anti-gun-violence-activism-toronto">Zero Gun Violence Movement</a>, a coalition of over 40 community organizations addressing socio-economic and structural causes of violence. City programs like <a href="https://www.toronto.ca/community-people/public-safety-alerts/community-safety-programs/focus-toronto/">FOCUS Toronto</a> have significantly reduced reliance on police, but need well funded non-police services to succeed.</p>
<p>The Ministry of the Solicitor General did not answer directly when asked by e-mail if the province’s spending on the police reflected its aspirations for community safety. But it did say that it “encourages collaboration between police services and community organizations in the delivery of community safety initiatives.” </p>
<p>Encouraging collaboration is one thing. Actually funding it is another.</p>
<p>The fact that so little funding is available for non-police service providers is even more troubling because the new <a href="https://www.ontario.ca/laws/statute/s19001">Police Services Act</a> requires municipalities to design, implement (and fund) CSWB plans. Providing so much additional money to police and so little to other safety and well-being organizations means enforcement will overshadow prevention.</p>
<p>Providing $200 million over four years is not a huge amount when spread across Ontario, but it is also not insignificant — especially considering the shoestring budgets available to organizations doing vital work to address the socio-economic determinants of safety.</p>
<h2>Defunding as reinvestment</h2>
<p>At the core of calls to defund the police is a desire to reinvest in communities in ways that reduce our reliance on police. As police themselves often remind us, they are <a href="https://www.cbc.ca/news/canada/police-training-mental-illness-deaths-1.3699664">not social workers</a> and the majority of the issues they deal with are not criminal in nature.</p>
<p>Provincial cuts to municipal budgets are expected to cost the City of Toronto about <a href="https://www.cbc.ca/news/canada/toronto/ford-government-cuts-will-blow-2-billion-hole-in-municipal-budgets-moody-s-warns-1.5191709">$178 million per year</a>, which means the city has far fewer resources available to municipal investments in prevention and social development work. The Social Development, Finance and Administration program, where Toronto’s CSWB Unit is located, experienced <a href="https://www.toronto.ca/wp-content/uploads/2020/04/8f3c-SDFA-2020-Public-Books.pdf">a 30 per cent reduction in funding from 2019 to 2020</a>. </p>
<p>Social services are overstretched, and there is a real discussion to be had about the contributions of other provincial ministries in funding preventive work. But as it stands, the Ministry of the Solicitor General has over $200 million available for safety and well-being initiatives, and $199 million of that is going to police forces that are already very well funded.</p>
<p>Defunding the police is a creative proposal. It asks how we can redirect existing money to fight the causes of harm in our society. The province already has a policy framework to guide reinvestment and some money to make it happen — in theory, things could move quickly. So write to your city councillor, but <a href="https://www.ola.org/en/members/current">don’t forget about your member of the provincial parliament</a>.</p><img src="https://counter.theconversation.com/content/140306/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Claire Wilmot 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 provincial government has funding to support non-police safety and well-being initiatives — but 99 per cent of it just supplements police budgets.Claire Wilmot, PhD researcher, Department of gender studies, London School of Economics and Political ScienceLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/585932016-05-09T20:04:57Z2016-05-09T20:04:57ZExplainer: why we can’t fix the structural deficit without tax and spending reform<p><em>The Federal Budget has been delivered and Australians are headed for the polls. In this series, Reform Revisited, we ask writers for innovative ways to tackle our reform agenda.</em></p>
<p>It is generally recognised that Australia has a <a href="https://theconversation.com/budget-explainer-the-structural-deficit-and-what-it-means-57437">structural budget deficit</a> which needs to be reduced. There is also quite widespread acceptance that our <a href="https://theconversation.com/six-simple-tax-reforms-plagued-by-politics-44906">tax system is in need of reform</a>. Two glaring omissions from the recent federal budget were plans to reduce the deficit any time soon or embark on meaningful tax reform. Is there any connection or conflict between the two?</p>
<p>In trying to address this question there are really three different issues: the size of government expenditure; how much of this expenditure should be financed from taxes; and how the tax system should be structured in order to prevent endless deficits in the future.</p>
<p>In theory these three issues are quite separate but inevitably they become confused and political. For instance, Labor might say schools expenditure must rise because improving education of the nation’s children is far too important for us not to do so. This means raising more revenue through increasing the deficit (borrowing) or raising taxes where the burden must fall on “big business” or “wealthy people”. The Coalition would have a different set of priorities which change the mix or amount of government expenditure, how it is financed and who bears the tax burden.</p>
<p>Governments provide many goods and services, including health, education, infrastructure and national defence. They also regulate individual and private sector business activity. One way to address the structural deficit is to permanently reduce government expenditure as a percentage of gross domestic product (GDP). Government expenditure as a proportion of GDP is currently higher than the long-term average. </p>
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<p>There is a well-articulated economic theory underlying the principles governing efficient government expenditure on goods and services. There is no space here to develop this further but the main point is that the benefits of this expenditure should exceed the costs in terms of all the other things that could be done with these funds. Clearly governments of all persuasions have been somewhat less than rigorous in spending wisely according to this criteria rather than according to their own or, vested interests’, preferences. </p>
<h2>Equity vs efficiency</h2>
<p>Much of government expenditure however, is not based mainly on the efficient provision of goods and services such as infrastructure projects, which facilitate economic growth and productivity. Instead, it aims to address equity issues based on the principle that the market, left to its own devices, will result in an inequitable allocation of income, goods or wealth. Thus, the biggest single item of government expenditure in Australia is social welfare. </p>
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<p>It could be argued that most social welfare reduces economic efficiency since most welfare payments go to people who produce little or no market output such as the unemployed, disabled or elderly, but most humane societies accept the need to help the worse off. Countries, however, differ quite markedly in the weight given to equity versus efficiency.</p>
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<p>Governments also need to allocate expenditure just to actually carry out the functions of government administration through, for instance, the public service and the legal system. The size of these operations depends, among other things, on the amount of regulation imposed on individuals and firms plus the number and quality of programs government uses to provide goods and services.</p>
<p>To raise the revenue for these activities governments must impose taxes on households, consumers and firms. Most taxes are used to raise revenue, but some taxes, such as those on cigarettes or alcohol, are also intended to discourage what society views as “undesirable” behaviour. But the fact that these taxes are such huge revenue raisers implies they are pretty ineffective at reducing consumption. </p>
<p>Income tax is the largest source of revenue for the federal government and is levied on the wages, salaries and other income of households (personal income tax) and the profits of firms (company income tax). Clearly, reducing the deficit is most easily done by raising income tax rates since revenue from this source is so big. Restructuring the tax system to rely less on direct (income) tax to indirect tax (such as the GST and excise taxes) requires a big shift in revenue collection.</p>
<h2>Why reform is so hard</h2>
<p>Although raising taxes seems like the easy way out for reducing the deficit, critics (many economists) argue that the loss to efficiency (growth and productivity) of raising taxes, particularly income taxes, is too great. Even harsher critics argue that the current level (and structure) of taxation is stifling economic activity. </p>
<p>The essential argument, which again would require another article to elaborate on, is that the private sector (households and firms) is best placed to generate output and growth of goods and services in the economy; and reducing the resources available to the private sector leads to less output, jobs, etc. </p>
<p>Income taxes are regarded as particularly inefficient because they also reduce rewards to effort for both workers and firms and therefore act as a disincentive to wealth (and employment) creation. In fact, just about every tax (and most government payments) results in distortions, many of which were unanticipated, in behaviour by individuals – the most recent one that comes to mind is <a href="https://theconversation.com/au/topics/negative-gearing">negative gearing.</a></p>
<p>Unfortunately, in economics any distortion usually has people who gain from government revenue and taxes. So although it may be in the interest of the economy as a whole to reduce taxation, change the tax structure, rationalise benefits and reduce the structural deficit, some groups (which may be quite large) of individuals will usually be worse off by the changes. </p>
<p>And in a democracy these individuals vote, have the ability to influence the media, or lobby politicians to prevent any changes which would disadvantage them. Witness the way just about every idea to reduce the deficit, reduce government expenditure or restructure taxes tends to get shot down so quickly in Australia without sensible consideration or debate.</p>
<p>Perhaps fixing the structural deficit is too big a task given the reluctance to tackle any meaningful tax and spending reform!</p>
<p><em>Read more in the series <a href="https://theconversation.com/au/topics/reform-revisited">here</a>.</em></p><img src="https://counter.theconversation.com/content/58593/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Phil Lewis does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article. He also has no relevant affiliations. During his career he has received funding from many private and public sector organisations including most recently the ARC, NCVER, DEEWR, the AFPC, ABLA and CPA Australia.</span></em></p>Reform remains a challenge when every idea to reduce the deficit, reduce government expenditure or restructure taxes tends to get shot down in Australia.Phil Lewis, Professor of Economics, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/581442016-05-04T02:36:05Z2016-05-04T02:36:05ZThree critical tests for Budget 2016: how does it fare?<p>There are three critical tests for this year’s budget. Is it serious about repairing Australia’s ongoing structural budget deficits? Does it make much of a difference to economic growth? And is it fair?</p>
<h2>Budget repair</h2>
<p>Over the last year, the bottom line got worse. The long-promised return to surplus receded another year over the horizon. This is the seventh time a budget has forecast a drift back to surplus over the following four years while the outcome for the current year showed minimal improvement over the year before.</p>
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<p>Also consistent with the history of the last seven years, most of the damage was done by “parameter variations” – changes in the economy that meant the budget didn’t live up to previous expectations. </p>
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<p>The government has made much of the need to repair the budget through spending reductions rather than tax increases. Overall, however, forecasts assume that most of budget repair will be the result of increasing revenues as a share of GDP. A large component is that nominal wages are expected to rise, leading to higher income tax collections, known by budget nerds as “fiscal drag”, and commonly referred to as “bracket creep”. </p>
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<p>There’s plenty of room for things to keep going wrong. The largest risk is that nominal wages may be lower than forecast. </p>
<p>Last week the Australian Bureau of Statistics reported much lower inflation than expected. On the day of the federal budget the Reserve Bank responded by cutting interest rates, implying a real risk that unusually low inflation will persist. If it does, then income tax collections will be hit, hurting the budget bottom line, particularly in the last year or two of the budget estimates.</p>
<p>This presents an interesting challenge for Treasury. If an election is called towards the end of this week, then it must release PEFO – the Pre-election Economic and Fiscal Outlook – by around May 20. With inflation lurching south, PEFO may significantly revise the budget bottom line, which will inevitably raise perceptions – probably unfairly – that the government is not firmly in control of economic management.</p>
<p>The other big risk is that export prices fall short of forecasts. The budget assumes an iron ore price of US$55 per tonne. This is close to recent prices, but they were US$40 a tonne just six months ago. If the price drops back US$10 to US$45 per tonne, budget balances are expected to be A$4 billion a year worse off.</p>
<p>Specific measures don’t do much collectively to improve the budget bottom line. As with each of the last seven years, there are substantial gross tax increases and spending reductions, but other decisions largely offset these. Overall, specific measures drag on the budget outcome by $5 billion for the coming year, but improve the last estimated year (2019-20) by $6 billion. </p>
<h2>Jobs and growth</h2>
<p>The key selling point for the budget is “jobs and growth”. However, there are questions about whether the budget initiatives will matter much to the economy within the next four years.</p>
<p>The largest single initiative is a cut to the corporate tax rate, particularly for small-to-medium businesses. The tax rate will be cut from 28.5% to 27.5%, and by 2019-20 this will apply to businesses with up to $10 million in turnover, up from the current limit of $2 million. </p>
<p>This will doubtless be popular with hundreds of thousands of small businesses. However, given Australia’s dividend imputation scheme, the tax change makes no difference to the amount of tax levied on profits paid out to Australian business owners. A lower tax rate only matters to the budget and the economy when businesses re-invest retained earnings. </p>
<p>However, the overall effect will be small. The tax changes are supposed to reduce tax collected in 2019-20 by A$2 billion – by definition, money retained in businesses and re-invested. This compares with total corporate investment in capital of about <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/5625.0">A$120 billion a year</a>, and much more in paying for additional staff. The tax change is small beer in comparison.</p>
<p>There may be a larger tankard of beer in reducing tax rates for foreign corporates. But they will receive no benefit until after 2020-21 – well after the next two elections. And recent work has cast doubt on <a href="https://theconversation.com/big-business-doesnt-want-to-talk-about-it-but-smes-lose-from-a-company-tax-cut-57965">how much of the economic benefit will ultimately benefit Australians</a>.</p>
<p>It is stretching things to believe that other measures will turbo-charge the economy. The budget contains relatively little new infrastructure spending. </p>
<p>Instead there are a lot of plans to do more planning. The most promising economic feature may be a new <a href="http://www.abc.net.au/news/2016-05-03/federal-budget-rural-youth-job-plan/7376562">Youth Jobs PaTH package</a>. This replaces work for the dole with a training, internship and subsidised employment pathway that is at least a little closer to <a href="https://theconversation.com/four-ways-to-get-people-back-into-work-1157">what the literature recognises as best practice</a>.</p>
<h2>Fairness</h2>
<p>Despite its jobs and growth packaging, the boldest moves in the budget were about fairness. Wide-ranging reforms to superannuation are a big move in the right direction. The <a href="https://theconversation.com/catch-up-super-contributions-a-tax-break-for-rich-old-men-51116">current system is poorly targeted</a>, with most of the tax concessions going to the top 20% of taxpayers who need the least help in saving for retirement. </p>
<p>Under the reforms, the top 4% will pay about A$2.6 billion more tax in 2019-20, offset by an additional A$1.8 billion tax concessions for the bottom 28%. These are material changes very different from the tinkering at the edges that has characterised superannuation reform over the last decade.</p>
<p>More controversially, the budget raises the 37% income tax threshold from $80,000 to $87,000. This gives the top 20% of income earners an extra $315 a year. </p>
<p>The fairness of concentrating tax relief on this group depends on the date of comparison. Genuinely middle-income earners (on $45,000 a year) have lost a greater percentage of their income in tax because of bracket creep since the Coalition took office. However, the change in percentage of income paid in tax is more or less the same for all income groups since 2011-12, because lower-income groups received more benefit from carbon tax compensation.</p>
<h2>Conclusion</h2>
<p>Budget 2016 was much like many of its predecessors over the last seven years. Budget repair was put off till later, and the net impact of budget decisions was small. </p>
<p>Although much was made of individual initiatives, these are unlikely to make much difference to economic growth in the next four years. </p>
<p>Although fairness, like beauty, is in the eye of the beholder, this budget will be easier to defend than some others in recent times.</p><img src="https://counter.theconversation.com/content/58144/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Grattan Institute began with contributions to its endowment of $15 million from each of the Federal and Victorian Governments. In order to safeguard its independence, Grattan Institute’s board controls this endowment. The funds are invested and Grattan uses the income to pursue its activities.</span></em></p><p class="fine-print"><em><span>Danielle Wood 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>Budget repair was put off till later, and the net impact of decisions in the budget was small, but it will be easier to defend in the coming election campaign than some other recent efforts.John Daley, Chief Executive Officer, Grattan InstituteDanielle Wood, Fellow, Australian Perspectives, Grattan InstituteLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/574372016-04-21T20:09:20Z2016-04-21T20:09:20ZBudget explainer: the structural deficit and what it means<figure><img src="https://images.theconversation.com/files/119601/original/image-20160421-8017-1uypith.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The ageing of Australia contributes to its structural deficit.</span> <span class="attribution"><span class="source">Flickr/Jonas Boni</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>In the lead-up to the federal budget there is the inevitable attention given to government spending and debt. But one of the increasingly pressing problems that Australia faces gets a lot less attention than it should. And that is its structural deficit.</p>
<p>To understand this, one must first consider the relationship between revenue and expenditure. Government revenues are largely determined by taxation and are heavily influenced by the ostensibly cyclical waxing and waning of economic conditions, both domestic and overseas. </p>
<p>Expenditure, on the other hand, is a function of underlying economic and demographic conditions and has, in part, counter-cyclical characteristics (with fiscal “stabilisers” such as unemployment benefits rising during an economic downturn). Structural deficits are related to underlying (or longer-term) economic and demographic conditions.</p>
<p>In Australia, the federal government’s expenditure has exceeded revenue in every fiscal year since 2008, and in 21 of the last 35 fiscal years. In recent years the deficit has been particularly large when compared to historical deficits (See Figure 1 below). </p>
<p>Overall, it is reasonable to conclude that the deficit has a significant structural component, and is not simply the product of short term economic woes or fiscal decisions.</p>
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<img alt="" src="https://images.theconversation.com/files/119606/original/image-20160421-8010-8cx89j.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/119606/original/image-20160421-8010-8cx89j.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=304&fit=crop&dpr=1 600w, https://images.theconversation.com/files/119606/original/image-20160421-8010-8cx89j.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=304&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/119606/original/image-20160421-8010-8cx89j.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=304&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/119606/original/image-20160421-8010-8cx89j.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=381&fit=crop&dpr=1 754w, https://images.theconversation.com/files/119606/original/image-20160421-8010-8cx89j.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=381&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/119606/original/image-20160421-8010-8cx89j.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=381&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p>Australian government revenues are spent on defence, education, health, social security and welfare, in addition to funding the public sector, distributing revenue to the States and Territories, and paying down debt. In 1993, approximately 2.2% of GDP was spent on defence, 2.1% on education, 3.3% on health and 8.7% on social security and welfare. Today, the spending pie has changed dramatically. </p>
<p>Spending on education and defence has declined, spending on health in the most recent fiscal year increased to 4.1% of GDP and spending on social security and welfare has risen to 9.2% of GDP.</p>
<p>An alternative way to evaluate the changing nature of Commonwealth government spending over the years is to examine spend in per-capita terms. Figure 2 shows per-capita expenditure by area of spend (in real terms) in 1992/93 and in 2014/15. In 1992/93, the Commonwealth spent about $1,500 per person (in today’s dollars) on health expenditure, just under $4000 per person in social security and welfare payments and about $940 on education. </p>
<p>Today, social security and welfare payments are about $6200 per person, health expenditure is over $2700 per person, while education has risen by a significantly smaller amount (to $1300 per person).</p>
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<img alt="" src="https://images.theconversation.com/files/119173/original/image-20160419-1273-mo6ncq.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/119173/original/image-20160419-1273-mo6ncq.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=403&fit=crop&dpr=1 600w, https://images.theconversation.com/files/119173/original/image-20160419-1273-mo6ncq.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=403&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/119173/original/image-20160419-1273-mo6ncq.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=403&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/119173/original/image-20160419-1273-mo6ncq.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=507&fit=crop&dpr=1 754w, https://images.theconversation.com/files/119173/original/image-20160419-1273-mo6ncq.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=507&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/119173/original/image-20160419-1273-mo6ncq.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=507&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p>Health and social security spending has always been important, and in the last budget spending in these two areas constituted over 50% of the Australian government’s total spend. Real growth in health and social security spending has surpassed 2% per annum over the last 25 or so years, exceeding the annual growth in population which has averaged about 1.4% over this period (and peaked at 2.1% in 2009). </p>
<p>This indicates that the increased expenditure observed in health and social security cannot be explained by inflation or population growth alone.</p>
<p>The crux of the issue seems to lie in the changing demographic of Australia. In the early 90s, about 11% of the population was made up of persons aged 65 or more. Today, this figure exceeds 15%. Put another way, the number of Australians in the 65+ age category has risen by about 2.4% per annum, while the rest of Australia has grown at about half that rate. Indeed, real per-capita health expenditure has been flat over the last 10 years when considering only persons in the 65+ age category.</p>
<p>To place the issue into perspective, Figure 3 shows actual and ABS projections of the number of persons in the 65+ age category over the period 1993 to 2040. Even with a decline in the growth rate of persons belonging to this category, about one in five Australians will be at or above 65 years of age by 2040. In the absence of any change, the budgetary impact of this demographic change will be primarily reflected in health and social security spending.</p>
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<p>The obvious question is: how will long-run health and social security requirements be funded? One possibility is to reign in onerous tax concessions. In the post-commodities boom era, however, almost nothing has been done on this front. This includes curtailing costly tax concessions on superannuation (both before and after retirement) and generous concessions on capital gains. Another is a sustained ramping-up of debt levels. The third, of course, is simply a decline in the provision of health and welfare services.</p>
<p>The first option – reviewing tax concessions – seems to be the most sensible in the long run. Indeed, delaying the inevitable simply places the issue in the hands of future taxpayers. To date, however, it is not clear how the major parties on either side of the political spectrum plan to tackle the fiscal issues stemming from Australia’s changing demographic landscape.</p><img src="https://counter.theconversation.com/content/57437/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Sarantis Tsiaplias 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>Beyond short-term revenue and expenditure, Australia’s structural deficit continues to grow.Sarantis Tsiaplias, Senior Research Fellow, Melbourne Institute of Applied Economic and Social Research, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/503092015-11-10T19:22:38Z2015-11-10T19:22:38ZThe federal budget is hard to ‘fix’, but here are some solutions<p>Why, after decades of relatively good budgetary management in Australia, is the Commonwealth budget so hard to fix? And why don’t many people seem to care? </p>
<p>We have had 24 years of economic growth, yet are now facing our eighth actual deficit in a row, with Budget Papers forecasting another three ahead, and more may come after that. </p>
<p>The combined recent deficits as this budget year rolls out (2015-16) now total a staggering $320 billion (with almost $40 billion still expected in the forward estimates). Moreover, most economic predictions are for much lower economic growth rates well into the future than occurred with the two mining booms of the 2000s to 2012.</p>
<h2>Have governments given up on a balanced budget?</h2>
<p>While former Labor Treasurer Wayne Swan was ever the muscular “spruiker” of budget surpluses, his promise in May 2010 to do so by 2013 - revised to a small budget surplus of $4 billion by June 2013 in May 2011 - never eventuated.</p>
<p>Following him, Joe Hockey merely spoke of his efforts at reducing the combined deficit from the one left to him by Labor, but sheepishly admitted the Commonwealth would have a projected annual deficit of $7 billion by 2019 under Coalition management. In his 2015 budget speech Hockey claimed the government inherited a running deficit totalling $123 billion by mid-2013 (when it was in fact more like $210 billion) and that he’d would have brought this figure down to $80 billion by 2019.</p>
<p>Both sides of politics have apparently now given up on balancing the budget in the medium term. Labor’s Shadow Treasurer Chris Bowen is now talking of a 10 year fiscal plan to repair the budget and so is not expecting a balance until around 2026! Not only is that date is four parliamentary terms away, it assumes that abstemious governments will actually spend less than they receive in income over all that time – recent track records on both sides suggests this is pure folly. </p>
<p>The Coalition’s new Treasurer Scott Morrison is not setting himself tricky target dates, preferring to accede with the previous Hockey mantra that the Coalition will arrive at a surplus before a Labor government would – a counter-factual we might reflect upon but cannot prove.</p>
<p>The persistent deficit problem is not just down to lower tax returns (the so-called “revenue problem”) because taxes are indeed growing moderately, but perhaps not by as much as Treasury would wish. The problem is largely down to levels of higher spending than we are prepared to pay for (the so-called “expansionary bias”). We seem to be running a structural deficit of around $30 billion per annum, with politicians continuing to spending now and leaving their successors to pay.</p>
<h2>The problem of Consolidated Revenue and “magic pudding” thinking</h2>
<p>The parlous state of the budget is due to systemic dysfunctionality. We have kept an anachronistic system inherited from the Royal Budget (the King’s Chest) – keeping all resources in one consolidated revenue account while separating expenditures from revenues. </p>
<p>For years, this was seen as a good way of keeping accounts clean and providing flexibility in expenditure terms. But now it is supremely dysfunctional to have one “magic pudding” fund against which all manner of claimants make audacious bids. The way we have allowed federalism to develop further compounds this sloppiness – because federal governments want to spend their huge tax take to gain most exposure, while the mendicant states and territories continue to cry poor and have few other tactics than going “cap in hand” to the Commonwealth for “more funds”.</p>
<p>Our central budget institutions no longer hold the line as guardians of the public purse; they are out-manoeuvred. The year-round budgetary bidding system constantly ratchets up spending levels as agencies ask for more like Oliver Twist. Many of our public policies are irresponsibly demand-driven with few caps, so people enjoy goods or services and the Commonwealth pays the eventual bill. </p>
<p>Some 85% of the federal budget is non-discretionary (entitlements, transfers, ongoing grants) which can’t be trimmed without a major fight in parliament. And we have enshrined a culture of compensation all-round (the “no discrimination” mantra) – and this applies to any changes in either entitlements or taxation levels. </p>
<h2>Small fixes that could have big results</h2>
<p>This is paralysing our ability to conduct real reform. If nearly 70% of households are likely to be compensated by a rise in the GST from 10% to 15%, then what is the point in raising the consumption tax at all? And if it doesn’t raise much more growth revenues there will be pressure in a few more years to raise it again.</p>
<p>There are some small incremental fixes that are available to redress our budget problems – such as hunting for savings across the portfolios, or reducing the number of bids, or getting agencies to raise some of their own revenues. More serious temporary fixes might include a complete ban on bids for two years making agencies themselves reallocate their resources to areas of most priority (as we did in 1986-87). </p>
<p>We could go further, like Sweden or Korea, and legislate fixed expenditure ceilings up to four years out which are very difficult to change without subsequent parliamentary approval. Such hard ceilings would force federal and state agencies to manage within budgets over the medium term, because there would be little chance of augmentation. So states running hospitals would have to manage within their imposed allocation and not manufacture waiting lists to claim more money from the Canberra pudding. </p>
<p>Canada uses a different prudential system to limit federal spending within the current budget year by initially only allocating some 70% of the budget outlays in the Main Estimates, and then trickling out additional supplementary allocations as and when its revenues are known and received. It prevents agencies’ overspending against revenue that has not yet eventuated (or will never materialise), and allows governments to direct greater spending ‘in-year’ to any pressing priorities.</p>
<h2>More ambitious solutions</h2>
<p>We might want to extend levies and charges more broadly, imposing costs on direct users rather than generic taxpayers – for roads, health care, GP visits, aged care, vocational education, pharmaceutical drugs, even public transport. Reverse mortgages for elderly home-owners to help pay for government aged pensions is also a proposal being floated around. Another important idea to help manage the provision of public goods or services is to hypothecate funds for dedicated purposes, as most of continental Europe does. </p>
<p>A specific contributory levy, say, for pharmaceuticals would be set and paid into a hypothecated account which could only be used to pay for subsidised prescriptions, and managed actuarially. If people wanted extensive low-cost prescriptions, then the levy would be set to cover that level of spending; if people wanted less subsidised medicine then a lower contribution could be imposed. Hypothecated provision would compartmentalise these items from consolidated revenue, make them self-funding and annually balanced, making the job of funding and managing core government activities so much easier.</p>
<p>More radical measures include a constitutional provision for balanced budgets (no planned deficits allowed to be introduced into the legislature) or a statutory provision for balanced budgets over a three year period (toughening the euphemistic accountancy jargon used in the <a href="https://www.comlaw.gov.au/Series/C2004A05333">Charter of Budget Honesty</a> designed to give governments all the wiggle room they need). Some aspects of Singapore’s budget processes are also worth considering. </p>
<p>Each year accurate projections about economic growth are made which determines a fixed formula of revenue income (roughly 17% of GDP); the expected actual revenue figure is directly transposed into a precise aggregate expenditure limit; no more, no less, it has to balance the revenue. </p>
<p>The expenditure budget is then allocated on a stipulated formula basis whereby each major policy sector of public spending receives a prescribed fixed share; there is no bidding or lobbying for more funds, but agencies have relative autonomy to recalibrate their priorities within their spending envelope. </p>
<p>They can shape their spending strategically. But the only avenue through which any budget growth can occur is if the economy as a whole grows; so agencies have enormous incentive to direct their thinking (and the majority of their funding) towards driving economic growth, from within their own budgets or in conjunction with other stakeholders. </p>
<h2>Systemic change is needed</h2>
<p>Singapore offers a markedly different way of deploying and investing public spending in a developed society; and it is worth remembering that Singapore’s achievements have occurred over the past 40 years of so. Before this it was once one of the destitute basket cases of South-east Asia with very low living standards, but now has a higher standard of living than most of the West and a per-capital income getting close to twice the Australian average.</p>
<p>Proposals to bring about systemic change to the traditional patterns of budgeting will be resisted by the conservative establishment and those that like the present dysfunctional system, or perhaps do well out of it themselves. But the public interest is not served by retaining perverse budgetary practices, or the perverse incentives that riddle the system. It is not served by sticking our heads in the sand in an ostrich-like mindset believing the problems will just go away. </p>
<p>The budget will not correct itself on automatic pilot; and the longer it doesn’t, the more we will pay in interest payments on mounting debt, the more our children will pay in years to come and the less we will have for today’s areas of genuine need.</p>
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<p><em>John will be on hand for an Author Q&A between noon and 1pm AEDT on Wednesday, November 11, 2015. Post your questions in the comments section below.</em></p><img src="https://counter.theconversation.com/content/50309/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Wanna 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>Solving the entrenched problems within our budgetary process is tricky - or is it?John Wanna, Sir John Bunting Chair of Public Administration, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/400892015-05-07T00:19:32Z2015-05-07T00:19:32ZBudget explainer: what is a structural deficit and why does Australia have one?<figure><img src="https://images.theconversation.com/files/77752/original/image-20150413-10549-1v60tsf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Fundamental shifts in the Australian economy have resulted in structural budget deficit</span> <span class="attribution"><span class="source">www.shutterstock.com</span></span></figcaption></figure><p><em>By cutting through the buzz and spin surrounding the federal budget, The Conversation’s budget explainers arm you with the key terms and facts needed to understand the budget and what it means for you.</em></p>
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<p>A budget deficit is the difference between revenues and expenditures. Revenues come mainly from taxes while expenditures include interest payments and government spending on areas such as education, health, welfare, and defence.</p>
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<img alt="" src="https://images.theconversation.com/files/79408/original/image-20150427-23939-8wen27.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/79408/original/image-20150427-23939-8wen27.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=479&fit=crop&dpr=1 600w, https://images.theconversation.com/files/79408/original/image-20150427-23939-8wen27.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=479&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/79408/original/image-20150427-23939-8wen27.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=479&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/79408/original/image-20150427-23939-8wen27.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=602&fit=crop&dpr=1 754w, https://images.theconversation.com/files/79408/original/image-20150427-23939-8wen27.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=602&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/79408/original/image-20150427-23939-8wen27.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=602&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p>Figure 1 shows how government receipts and payments, expressed as a percentage of nominal gross domestic product (GDP), have changed since the early 1990s. Total revenue fell during the global financial crisis (GFC) and is currently languishing at 23% while total expenditure rose during the GFC and is still at a high of 26%.</p>
<h2>Why a structural deficit is more concerning than a cyclical deficit</h2>
<p>What is concerning is that the budget deficit may get worse. This is because the problem with current revenues and expenditures is partly structural not just cyclical.</p>
<p>In general, budget balances are cyclical. Surpluses tend to occur during times of strong GDP growth when tax receipts are up and welfare spending is down. Deficits tend to occur and rise during times of economic slowdown, driven by a combination of declining tax revenues and rising welfare expenditure. It follows that a cyclical deficit will normally improve with economic growth.</p>
<p>In contrast, fiscal imbalances that are structural are caused by fundamental changes in the economy, and growth will not necessarily improve the deficit. </p>
<p>The classic example is expenditure on health – this is mainly structural as it is driven by an ageing population, and expenditure on age-related health issues will grow irrespective of the state of the economy.</p>
<p>Of course, structural and cyclical imbalances are not completely independent, as a prosperous economy is better equipped to finance any type of expenditure.</p>
<p>Unfortunately, splitting the budget deficit into its structural and cyclical components is not straightforward. Taxes and expenditures have elements of both, although they may be predominantly one type or other. </p>
<p>For example, tax revenues are mainly cyclical, rising and falling with changes in national income. However, a structural change in the economy can permanently change the source of income, as evidenced by the drop in the terms of trade and the commensurate (and permanent) drop in royalties associated with the mining sector.</p>
<p>The Australian Treasury itself has <a href="http://archive.treasury.gov.au/documents/1881/HTML/docshell.asp?URL=04_Structural_Budget_Balance.htm">explained</a> why determining the structural budget balance is so difficult and why their estimates differ from those proposed by the International Monetary Fund and the Organisation for Economic Co-operation and Development. </p>
<h2>Deconstructing the budget</h2>
<p>We can <a href="https://melbourneinstitute.com/downloads/policy_briefs_series/pb2015n02.pdf">deconstruct</a> the budget deficit roughly into its structural and cyclical parts by determining the share of revenue and expenditure that moves with nominal income. Intuitively, one estimates how much of the growth in total revenues and total expenditures is associated with the growth in nominal GDP and attributes the remainder to other factors such as discretionary policies and/or unexplained events.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/79407/original/image-20150427-23942-d81qkz.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/79407/original/image-20150427-23942-d81qkz.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=473&fit=crop&dpr=1 600w, https://images.theconversation.com/files/79407/original/image-20150427-23942-d81qkz.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=473&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/79407/original/image-20150427-23942-d81qkz.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=473&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/79407/original/image-20150427-23942-d81qkz.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=594&fit=crop&dpr=1 754w, https://images.theconversation.com/files/79407/original/image-20150427-23942-d81qkz.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=594&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/79407/original/image-20150427-23942-d81qkz.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=594&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p>Figure 2 illustrates the various components of the budget deficit. For convenience and to be pedantic about the use of the words “structural/cyclical”, the part which moves with nominal GDP is labelled as the “business cycle” component and the remainder is called the “other” component. </p>
<p>The “business cycle” part takes into account the boom effects of improvements in the terms of trade, slow growth and the GFC. </p>
<p>The “other” part is mainly due to the discretionary actions by governments to unexpected events like natural disasters and includes the stimulus packages during the GFC.</p>
<p>Figure 2 shows the 2014 budget deficit is split roughly between interest payments, business cycle effects and “other”.</p>
<p>The business cycle component is not small. It reflects the impact of slow growth but this estimated cyclical deficit gap will decrease with economic growth.</p>
<p>The service of government debt (the interest payments component) is not an immediate problem as interest rates are low. However, debt servicing will be a problem if, and when, interest payments accumulate to the point when they cannot be paid on a regular basis.</p>
<p>The “other” budget component illustrates the role played by changes in tax and expenditure policies. This estimate gives a very rough indication of the degree of fiscal consolidation needed to close the structural deficit gap.</p>
<h2>Policy Responses</h2>
<p>Understanding whether the fiscal balance is driven by cyclical or structural factors is important for informed policy discussion. </p>
<p>If the fiscal imbalances reflect normal and temporary changes to the state of the economy, then policy is better directed at smoothing deficits and surpluses. However, if the fiscal imbalances reflect fundamental (permanent) changes in the economy, then policy should be directed at altering the receipts and payments (ie changing taxes and expenditures). The former is more about growth stabilisation policies while the latter is more about fiscal policies.</p>
<p>The challenge is to identify the nature of the budget deficit problem (structural or cyclical), and to devise appropriate policy responses. </p>
<hr>
<p><strong>Read more Budget Explainers <a href="https://theconversation.com/au/topics/budget-explainer">here</a>.</strong></p>
<p><strong>Or interested in further budget coverage? Read more in our two series: <a href="https://theconversation.com/au/topics/economy-in-transition">Economy in Transition</a> and Australia’s <a href="https://theconversation.com/au/topics/five-pillar-economy">Five Pillar Economy</a>.</strong></p><img src="https://counter.theconversation.com/content/40089/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Guay Lim has received funding from the Australian Research Council.</span></em></p>In our federal budget explainer series, Guay Lim explains what Australia’s structural deficit really means.Guay Lim, Professorial Fellow, Deputy Director, Melbourne Institute of Applied Economic and Social Research , The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/404702015-05-06T19:49:58Z2015-05-06T19:49:58ZBudget explainer: What do key economic indicators tell us about the state of the economy?<figure><img src="https://images.theconversation.com/files/79872/original/image-20150430-6230-1ghlbmv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The key indicators of the health of the economy are the unemployment rate, inflation rate and economic growth.</span> <span class="attribution"><span class="source">AAP Image/Julian Smith</span></span></figcaption></figure><p><em>By cutting through the buzz and spin surrounding the federal budget, The Conversation’s budget explainers arm you with the key terms and facts needed to understand the budget and what it means for you.</em></p>
<hr>
<p>Certain policy objectives in macroeconomic policy are almost universally accepted by economists:</p>
<p>1. A stable and strong rate of economic growth;</p>
<p>2. Low unemployment; and</p>
<p>3. Stable and low inflation.</p>
<h2>Perhaps less universally accepted are:</h2>
<p>4. A manageable current account deficit in the balance of payments; and</p>
<p>5. Structural fiscal budget balance and a low (or zero) level of debt.</p>
<p>Number four of these objectives receives little attention in Australia these days. However, the fifth of these objectives appears to have taken over economic and political debate in Australia.</p>
<p>Certain key indicators are used to judge the health of the economy and to evaluate government or Reserve Bank policies in terms of their ability to reach these objectives.</p>
<h2>A stable and strong rate of economic growth</h2>
<p>Economic growth refers to the expansion of society’s productive potential. It is usually measured by the annual percentage change in real gross domestic product (GDP). </p>
<p>Real GDP is a measure of the value of production of all goods and services produced in Australia, after the effects of inflation have been removed. </p>
<p>Therefore, if economic growth is 3% this year, then 3% more goods and services were produced this year than in the previous year. </p>
<p>Real GDP and economic growth are not perfect measures of what’s happening to a society’s wellbeing. Nevertheless, more jobs, increased standards of living and providing for the most disadvantaged depend on having a strong rate of growth.</p>
<h2>Low unemployment</h2>
<p>Unemployment is the greatest contributing factor to poverty. High unemployment also represents a waste of economic resources as less is produced (lower GDP) if workers are not being fully utilised. </p>
<p>There are other costs associated with high unemployment including a loss of individual self esteem, loss of skills, retraining costs and social problems. Governments also face consequences such as having to reallocate scarce taxation revenue from productive projects to social security payments, as well as the electoral unpopularity often associated with high unemployment. </p>
<p>The widely quoted indicator of unemployment is the <a href="http://www.abs.gov.au/ausstats/abs@.nsf/products/FBE517ECA9B07F63CA257D0E001AC7D4?OpenDocument">unemployment rate</a> derived from the Australian Bureau of Statistics (ABS) Labour Force Survey. </p>
<p>The unemployment rate is the percentage of the labour force that is unemployed. The labour force is the sum of the employed and the unemployed. You only have to work for one hour in paid employment per week to be classified as employed! To be classified as unemployed you have to be ready to start work and have actively looked for work in the past four weeks before the survey. </p>
<p>About <a href="http://theconversation.com/unemployed-or-lazy-economists-know-better-30515">1.5 million people</a> of working age rely almost entirely on social security for a living but only a third are unemployed.</p>
<p>While an important aim is to reduce the unemployment rate, being too successful or reducing it too quickly can itself be a problem as this can be interpreted as evidence of a potential increase in inflation. In economics jargon, unemployment must not fall too near the “<a href="http://theconversation.com/not-just-a-number-defining-full-employment-15248">natural rate of unemployment</a>”.</p>
<h2>Stable and low inflation</h2>
<p>The inflation rate is the percentage increase in the general price level in the economy from one year to the next. </p>
<p>The most common measure of the general price level is the consumer price index (CPI). Although its measurement and interpretation is subject to many caveats it is still generally recognised as a good indicator of the cost of living of the average household. </p>
<p>If the index rises from, say, 120 to 122 then the inflation rate is 100*(122-120)/120 = 1.7%. </p>
<p>Wages and social security payments would need to rise by 1.7% in order for standards of living not to fall.</p>
<h2>A structural fiscal budget balance and a low (or zero) level of debt</h2>
<p>If the federal government’s expenditures are greater than its revenue a budget deficit results. Budget deficits add to government debt. </p>
<p>It is generally accepted the actual government budget will (and should) fluctuate between deficit and surplus during, respectively, downswings and upswings in the economy. </p>
<p>Unlike the actual budget balance, the structural balance is basically the budget deficit or surplus after accounting for cyclical movements in the economy – the balance when conditions are normal or average. </p>
<p>Considerable <a href="http://theconversation.com/australias-economy-is-healthy-so-how-can-there-be-a-budget-crisis-26036">political debate and media coverage</a> of deficit and debt issues concerns have centred on the fear that Australia, on its current trajectory, is heading for (or well on the way to) an unsustainable structural deficit.</p>
<h2>Other indicators</h2>
<p>The above areas may be traditional indicators of the health of the economy, yet they say little about the underlying processes which give rise to them. </p>
<p>For instance, economic growth can only increase and unemployment can only be reduced by firms increasing output and jobs and investing in new projects. This is why business confidence is so important. </p>
<p>The National Australia Bank (NAB) publishes a quarterly <a href="http://business.nab.com.au/tag/business-survey/">index</a> of business confidence based on a survey of Australian firms. These firms are asked to rate their expectations of a number of factors, such as employment and business profits. Indexes are calculated by taking the difference between the percentage of respondents nominating good or very good, or a rise and those nominating poor or very poor, or a fall. The business confidence index is an average of these individual indexes.</p>
<p>Businesses are unlikely to expand if they don’t think consumers are going to spend and this is where consumer confidence is important. </p>
<p>The <a href="https://melbourneinstitute.com/miaesr/publications/indicators/csi.html">Westpac-Melbourne Institute Consumer Sentiment index</a> is based on surveys of households regarding their expectation of key economic variables affecting them, such as the family finances. On the basis of whether their conditions are expected to improve or get worse households are classified as optimists or pessimists. If optimists outnumber pessimists then the index exceeds 100 and obviously the higher the index, the higher, on average, is consumer confidence.</p>
<p>Despite a myriad of indicators and attempts to introduce many other measures of wellbeing into the policy debate, such as the <a href="http://lateraleconomics.com.au/wp-content/uploads/2014/02/Fairfax-Lateral-Economics-Index-of-Australias-Wellbeing-Final-Report.pdf">Fairfax-Lateral Economics Index of Australia’s Wellbeing</a>, the unemployment rate, inflation rate and the rate of economic growth will continue to be the key indicators of the health of the economy.</p><img src="https://counter.theconversation.com/content/40470/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Phil Lewis does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article. He also has no relevant affiliations. During his career he has received funding from many private and public sector organisations including most recently the ARC, NCVER, DEEWR and the AFPC</span></em></p>The key economic indicators to look out for on budget night.Phil Lewis, Professor of Economics, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/411182015-05-05T13:44:42Z2015-05-05T13:44:42ZFact Check: did Labour overspend and leave a deficit that was out of control?<blockquote>
<p>No I don’t [accept that Labour overspent when it was last in power] … There was a global financial crisis which caused the deficit to rise. President Obama isn’t dealing with a high deficit because we built more schools and hospitals. He’s dealing with a high deficit because there was that global financial crisis. </p>
</blockquote>
<p><strong>Ed Miliband, Labour leader, in <a href="http://www.bbc.co.uk/iplayer/episode/b05t2k80/question-time-election-leaders-special">BBC Question Time</a> Election Leaders Special.</strong> </p>
<blockquote>
<p>Gordon Brown piled up debts, took us into the recession when we had a structural deficit that was out of control. </p>
</blockquote>
<p><strong>Michael Gove, Conservative party chief whip, speaking on <a href="http://www.bbc.co.uk/programmes/b05s35ww">BBC Radio 4’s World at One</a>.</strong> </p>
<p>First, and it is important to state this, the Labour government was not responsible for the 2008 recession. The recession was caused by the housing bubble bursting in the US which led to subsequent financial crises in other countries.</p>
<p>One could argue, as the BBC’s <a href="http://www.bbc.co.uk/news/business-32549892">Robert Peston</a> does, that banks should have been under stricter regulation in the UK under the Labour government. However, this is easy to say with the benefit of hindsight and no other political party was arguing in favour of more regulation of the banking sector at the time. In fact, the <a href="http://image.guardian.co.uk/sys-files/Politics/documents/2007/08/17/ECPGcomplete.pdf">Conservative party argued</a> for less regulation of the banking sector.</p>
<h2>What is a structural deficit?</h2>
<p>The government is said to be running a deficit if within a year it spends more than it receives in taxes. This deficit must be funded by borrowing which adds to the total amount of debt that the UK currently owes.</p>
<p>A deficit is not necessarily a problem – it is a way of keeping your spending constant. When you pay your heating by direct debit you are more than likely going to have deficit in winter when it is colder and be in credit in summer when it is warmer.</p>
<p>The problem comes when you have a structural deficit. This is when over the economic cycle, the UK is still running a deficit. Or to put it another way, we still have heating bills to pay even after completing our direct debit payments.</p>
<h2>Let’s talk about debt</h2>
<p>Talking about debt, without talking about our ability to pay it back is completely <a href="http://davidchivers.blogspot.co.uk/2015/04/stop-hammering-nails-in-with-shoes-why_19.html">useless</a>. This is why economists talk about debt as a percentage of GDP and as the Oxford economist <a href="http://mainlymacro.blogspot.co.uk/2015/04/mediamacro-myth-2-labour-profligacy.html">Simon Wren-Lewis</a> points out, the debt to GDP ratio was not particularly high historically when the financial crisis hit in 2008.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/80284/original/image-20150504-23505-1w6nidj.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/80284/original/image-20150504-23505-1w6nidj.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/80284/original/image-20150504-23505-1w6nidj.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=360&fit=crop&dpr=1 600w, https://images.theconversation.com/files/80284/original/image-20150504-23505-1w6nidj.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=360&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/80284/original/image-20150504-23505-1w6nidj.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=360&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/80284/original/image-20150504-23505-1w6nidj.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=453&fit=crop&dpr=1 754w, https://images.theconversation.com/files/80284/original/image-20150504-23505-1w6nidj.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=453&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/80284/original/image-20150504-23505-1w6nidj.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=453&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="http://mainlymacro.blogspot.co.uk/2015/04/mediamacro-myth-2-labour-profligacy.html">Simon Wren-Lewis</a>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>The reason why this ratio increased post-2008 was largely due to the recession. In fact, post-2010 when the Conservative coalition took over, <a href="http://www.ons.gov.uk/ons/rel/psa/maast-supplementary-data-tables/q4-2014/rft---m1-9-tables.xls">this ratio increased</a> from 78% to over 90%. Although the coalition has brought the deficit down, there is <a href="http://www.ons.gov.uk/ons/rel/psa/maast-supplementary-data-tables/q4-2014/rft---m1-9-tables.xls">still a deficit</a> which we must pay off. Naturally, this extra borrowing increases the overall size of the UK debt. Furthermore, by bringing the deficit down too quickly it <a href="http://niesr.ac.uk/blog/fiscal-consolidation-and-growth-whats-going#.VUh_WBc0yY1">has reduced our ability</a> to pay back the debt by lowering GDP.</p>
<p>This is not to say the <a href="http://oxrep.oxfordjournals.org/content/29/1/25.full.pdf+html">Labour government</a> behaved fiscally responsibly during its term in office with over-optimistic forecasts and problems with fiscal rules. In fact, some praise needs to be given to the coalition for <a href="https://www.gov.uk/government/speeches/speech-by-the-chancellor-of-the-exchequer-rt-hon-george-osborne-mp-on-the-obr-and-spending-announcements">setting up the Office of Budget Responsibility</a> in May 2010 to combat some of these issues.</p>
<p>However, the coalition’s narrative – emphasised by Michael Gove – that somehow the Labour government was “out of control” with its spending is inaccurate. The reason this narrative is still persisting has as much to do with Labour’s ineptitude to dispel this myth as the <a href="http://mainlymacro.blogspot.co.uk/2015/05/on-mediamacro.html">media coverage</a> of the issue.</p>
<p>Most importantly, even if we consider the debt to GDP ratio too high under Labour, this is not a reasonable justification for the coalition to impose austerity in a recession where interest rates are at their <a href="https://longandvariable.wordpress.com/2014/12/18/money-inflation-and-the-zero-bound-krugman-evans-pritchard-revisited/">lowest point</a>. To go back to the <a href="http://davidchivers.blogspot.co.uk/2015/04/air-conditioning-is-useless-when-it-is.html">heating analogy</a>, air conditioning is useless when it is freezing outside.</p>
<h2>Verdict</h2>
<p>If we knew that the financial crisis was about to happen then one could argue that Labour would have delayed some of the pre-crisis spending to help in buffering the impact of the recession. But this is easy to say with the benefit of hindsight. So on this basis, it is unfair to say that Labour “overspent”.</p>
<h2>Review</h2>
<p>This is a clear piece which sets out the key developments in spending and borrowing during the last Labour government. It clears up a good deal of confusion about these developments which, as the pieces notes, has been prevalent in much of the recent discussion.</p>
<p>It may be worth adding that any claims about the structural deficit need to be treated with caution. In principle, a country is running a structural deficit if the economy was operating at (or around) full capacity with no output gap – which the <a href="http://budgetresponsibility.org.uk/wordpress/docs/WorkingPaperNo1-Estimating-the-UKs-historical-output-gap.pdf">Office of Budget Responsibility describes as</a> “the difference between the current level of activity in the economy and the potential level it could sustain while keeping inflation stable in the long term”. In practice, estimating the output gap for the UK is difficult. The OBR notes three different methodologies for doing so and estimates of the UK’s output gap vary considerably between economic forecasters. </p>
<p>For a complex modern economy, with a large services sector, it is far harder to estimate what full capacity is than for, say, an old-style production line factory. Claims that the UK had a structural deficit at a particular time are critically dependent on estimates of the output gap, and such estimates are subject to margins of error. – <strong>Jonathan Perraton</strong></p>
<div class="callout">The Conversation is fact checking political statements in the lead-up to the May UK general election. Statements are checked by an academic with expertise in the area. A second academic expert reviews an anonymous copy of the article.<br><br><a href="https://theconversation.com/factchecks/new">Click here to request a check</a>. Please include the statement you would like us to check, the date it was made, and a link if possible. You can also email factcheck@theconversation.com </div><img src="https://counter.theconversation.com/content/41118/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>David Chivers receives funding from the Economic and Social Research Council, but the ideas expressed in this article are his own.</span></em></p><p class="fine-print"><em><span>Jonathan Perraton 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>Ed Miliband says Labour did not overspend when it was last in office. He’s right.David Chivers, Lecturer in Economics, Exeter College, University of OxfordLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/392992015-03-25T19:17:44Z2015-03-25T19:17:44ZFrom ‘debt disaster’ to ‘good result’: a budget message lost<p>A week may be a long time in politics, but it’s not in economics. The economic outlooks of nations almost never change radically in a short space of time. So it was interesting this week so see Australian Prime Minister Tony Abbott do a u-turn on debt. Last week all debt was evil. This week a 60% debt-to-GDP ratio is a <a href="http://www.abc.net.au/7.30/content/2015/s4201187.htm">“a pretty good result”</a>.</p>
<p>At the time of last year’s budget we were told Australia had a debt crisis. So bad indeed that we needed a very un-Liberal 2% tax hike dubbed the “debt levy”. I was one of a number of economists <a href="https://theconversation.com/australia-does-not-have-a-debt-crisis-so-just-say-no-joe-26148">who pointed out</a> that Commonwealth net debt was around 11% of GDP: the third lowest in the OECD, low by historical standards, and way below Greece (155%), Italy (103%), the USA (87%) and the OECD average (50%). </p>
<p>Like me, Deloitte Access Economics’ Chris Richardson and the Business Council of Australia have consistently said that - although we don’t have a debt crisis - we do have a serious <a href="https://theconversation.com/structural-deficit-is-hockeys-elephant-in-the-room-21507">structural budget deficit problem</a>. Spending is larger than receipts, and spending is growing at a much faster rate. </p>
<p>Presumably this view is now deemed irresponsibly alarmist by our PM and Treasurer Joe Hockey. After all, we’re on a glide path to the sweet equanimity of 60% debt to GDP. What are these uppity economic types doing complaining about the gap between taxes and spending?</p>
<h2>Moving the goalposts</h2>
<p>I like it when politicians change their minds — it shows a willingness to update based on new information. But I don’t like it when politicians change the facts. And the recent revisionism looks very much like the latter.</p>
<p>Stuck with the inability to sell structural changes to our deficit problems, our political leaders have shifted the goalposts. After complaining that the Senate would not pass their last budget, they now tell us that it has put us on a stable path for decades to come. Seriously?</p>
<p>So let me get this straight. Legislation that largely didn’t get enacted has solved the problem? Is this the economic equivalent of the quantum-physics phenomenon “spooky action at a distance”? </p>
<p>No, and indeed therein lies the rub. What did get passed was not a host of structural reforms, but a massive shift of responsibility for expenditures from the Commonwealth to the states. The one thing the last budget did do was throw an A$80 billion hospital pass (pun sort of intended) to the states.</p>
<p>The last budget, as enacted, did nothing to address growth in health and education spending. It just took a chunk of it off the Commonwealth government books and put it on the state governments’ books. That’s nothing more than an accounting trick. It doesn’t change what government as a whole has to spend.</p>
<p>I’m not going to get into a discussion about <a href="https://theconversation.com/renewing-federalism-what-are-the-solutions-to-vertical-fiscal-imbalance-31422">“vertical fiscal imbalance”</a> — largely because it is incredibly boring — but it is simply not OK for the Commonwealth government to take credit for expenditure cuts they haven’t made. They’ve just told someone else — the states — to pick up the tab.</p>
<h2>The real story</h2>
<p>The bottom line is this: we don’t have a debt crisis, but we do have a structural deficit problem. Government spending is growing much faster than government revenues. And this isn’t a blip, it’s the product of an ageing population, technological change and old-style taxation arrangements that put too much emphasis on personal and business income taxes that are inefficient and under threat. The problem has not been solved; it has barely been touched.</p>
<p>This government owes it to all of us to treat us like adults. Last year’s budget might not have been fair, but it did contain measures that tackled the structural deficit. Because of a shockingly bungled sell job we are now told that it was all effectively unnecessary. </p>
<p>The Australian people are too smart to fall for that. We need to be told what the problem is and what the options are to address it. </p>
<p>Trying to scare and bully us into major cuts didn’t work last year. And pretending that there is no problem and so small business can get tax cuts and families some extra goodies won’t work this year. It’s not exactly déjà vu all over again, but it might as well be. The voters didn’t tolerate being treated like fools last May and won’t tolerate it this May.</p>
<p>Tony Abbott and Joe Hockey need to get their story straight. Neither the public nor the party room will give them much more time to do so.</p>
<hr>
<p><em>Richard Holden will be on hand for an Author Q&A session between 10 and 11am AEDT on Thursday March 26. Post your questions about the article in the comments section below.</em></p><img src="https://counter.theconversation.com/content/39299/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden is an ARC Future Fellow.</span></em></p>Until government leaders acknowledge Australia’s structural deficit and stop obsessing about debt, voters will be left frustrated.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/354982014-12-16T19:48:13Z2014-12-16T19:48:13ZWhy the federal budget is not like a household budget<p>Treasurer Joe Hockey is experiencing difficult times. Deteriorating terms of trade and an uncooperative senate mean that he cannot deliver the surplus when he said he would and he cannot continue to cut government expenditure without risking a recession.</p>
<p>I have some comforting news for Joe Hockey: the importance of the whole deficit/surplus thing has been greatly exaggerated – with a lot of help from Joe himself of course. The focus on deficits and surpluses distracts us from what’s really important in the macro economy.</p>
<p>Hockey and Abbott are very fond of using <a href="http://www.liberal.org.au/latest-news/2012/11/23/tony-abbott-joint-press-release-government-must-live-within-its-means">household analogies</a> when discussing government finances - Hockey again compared Australia’s economy to a household budget in his Mid-Year Economic and Fiscal Outlook. However, a government that is sovereign with respect to its own <a href="http://en.wikipedia.org/wiki/Fiat_money">fiat currency</a> bears no resemblance at all to a household. Such a government creates the money we all use, either physically on a printing press or, more importantly, electronically in the accounts of financial institutions.</p>
<h2>Licence to print money</h2>
<p>Everyone understands that governments can create money. Most people also understand that governments don’t just create all the money they need for all the things people want because it would cause inflation. Inflation is the devaluation of money. If you have a really good season for growing apples and there is a glut, the price of apples falls. Similarly, if you have a glut of money, the price of money falls. That’s inflation.</p>
<p>So, here lies the key insight. Inflation is the limiting factor for government expenditure, not taxes or borrowing. A government that can create money doesn’t need your money from taxation or from borrowing in order to spend. There is no limit to how much money a sovereign government can spend, but if government spending plus private spending exceeds the productive capacity of the economy then you get inflation.</p>
<p>The real calculation faced by government should not be about how much money the government has – it has an infinite amount. The calculation should be about the capacity of the economy to absorb government spending without driving inflation.</p>
<p>Seeking a balanced budget and automatically borrowing any deficit spending (as we currently do) is an effective but unsophisticated way of ensuring government spending doesn’t cause runaway inflation. Taxes and government borrowing remove money from the private sector, creating space for government spending (which injects money into the private sector). Remember, the government does not have to borrow or tax in order to finance spending because they can create money.</p>
<p>The slowing Australian economy combined with the dramatic fall in global oil prices mean that inflation is set to fall and unemployment is rising. This is precisely the kind of environment into which the federal government could spend without borrowing (i.e. create money). Times like these represent opportunities for the government to finance productivity improving infrastructure and provide much needed services for nothing. I know it sounds too good to be true but this is the reality of a fiscally sovereign government.</p>
<h2>The government could spend more</h2>
<p>Can the government just spend as much as it wants on whatever it wants? Of course not, the result would be out-of-control inflation. Can it spend a lot more than it currently is without substantial negative consequences? Absolutely.</p>
<p>The much discussed “<a href="http://www.bankofengland.co.uk/monetarypolicy/pages/qe/default.aspx">quantitative easing</a>” in the US, UK and EU is an example of this kind of spending (though very poorly targeted). The US Federal Reserve has <a href="http://www.economist.com/blogs/economist-explains/2014/01/economist-explains-7">created trillions of dollars out of thin air</a> and used it to buy risky financial assets and government bonds in order to take the risk off the balance sheets of financial institutions and improve their supply of money. The money was created with keystrokes on a computer which simply credit the accounts that these financial institutions hold with the Federal Reserve. There has been no runaway inflationary impact of this “printing” of trillions of dollars.</p>
<p>This reality of fiat currency is very difficult for many people to grasp but it’s not quite the magic pudding that perhaps it appears to be. When a government creates money, it isn’t creating value from nothing. The value lies in the human and capital resources that are underutilised in the economy. The money created by the government is simply the lubricant needed to mobilise these resources.</p>
<p>So, productive government spending is limited by the capacity of the economy to provide the goods and services that the government wants to purchase plus the goods and services the non-government sector wants to purchase. During economic downturns, and especially in recessions, there is spare capacity in the economy which can be employed by government. It’s possible, with this in mind, to quite easily return to the post-war days of genuine <a href="http://e1.newcastle.edu.au/coffee/pubs/reports/2008/CofFEE_JA/CofFEE_JA_final_report_November_2008.pdf">full employment</a> even during an economic downturn.</p>
<h2>Some basic realities</h2>
<p>Until people understand the basic realities of monetary economics we cannot have a meaningful discussion of government finances. Rather than worrying about deficits and surpluses we should be asking whether the economy would benefit from greater or lesser government expenditure or taxation. This calculation balances unemployment, spare capacity, and the need for infrastructure and services against inflation risk. It’s a complex calculation but the underlying principles are pretty straightforward.</p>
<p>Let me just restate for emphasis: the need for balanced federal budgets is a myth. Like many myths, it does have some factual historical origins. Back when currencies were backed by gold it was possible for governments to go broke. Because modern currencies are not backed by anything material, sovereign governments cannot run out of money and can never be insolvent in their own currency. Somehow, mainstream political thinking hasn’t kept up with the dramatic changes in the monetary system that occurred more than 40 years ago.</p>
<p>The first of our politicians to really understand this and to communicate it effectively to the public will have at their disposal the tools to completely reshape our economy for the better. I know politicians can be slow off the mark but 40 years is long enough. It’s time they caught up.</p><img src="https://counter.theconversation.com/content/35498/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Warwick Smith 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>Treasurer Joe Hockey is experiencing difficult times. Deteriorating terms of trade and an uncooperative senate mean that he cannot deliver the surplus when he said he would and he cannot continue to cut…Warwick Smith, Research economist, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/215072013-12-16T05:08:08Z2013-12-16T05:08:08ZStructural deficit is Hockey’s elephant in the room<figure><img src="https://images.theconversation.com/files/37840/original/m56fz4c2-1387160222.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Deficits in the longer term are not sustainable. </span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>Media reports preceding the mid year economic and fiscal outlook suggest we should expect a deficit of just under A$50 billion, a further deterioration of Australia’s budget position since the pre-election figures were released in late August. </p>
<p>Such a deterioration underlines the continuing budget policy conflict facing both the commonwealth and state governments in balancing the need to address the structural budget deficit against compelling expenditure priorities.</p>
<p>Over the medium and longer term, the underlying structural budget deficits are projected to increase with time. As a result, current expenditure and taxation policies are unsustainable. In the immediate future, there is considerable evidence of a flat economy with insufficient private sector demand to support full employment.</p>
<h2>Why our structural deficit will persist</h2>
<p>A number of reports, including Treasury’s 2010 Intergenerational Report, Grattan Institute’s <a href="https://theconversation.com/australian-governments-face-a-decade-of-budget-deficits-13616">Budget Pressures on Australian governments</a>, and <a href="http://www.pwc.com.au/media-centre/2013/tax-reform-jul13.htm">PricewaterhouseCoopers</a> project future government expenditure under current programs to increase as a share of national income. While the specific growth number and details vary across the reports, they all project the share of government expenditure to increase from the current level of about 32% of national income by another 2-4 percentage points by the 2020s and further increases into the future. </p>
<p>Increases in health expenditure per person are the principal driving force, in part as a result of technological gains contributing to longer life expectancy and good health. Ageing of the population also contributes, and especially a fall in the number of people in the workforce relative to the number of dependents. </p>
<p>These projections have not factored in anticipated new expenditure programs such as the National Disability Insurance Scheme, the Gonski education reforms (which the government at first announced it would dump (<a href="https://theconversation.com/from-gonski-to-gone-to-gonski-again-school-funding-future-remains-uncertain-21025">only to later resurrect</a> in an altered form), the Coalition’s $5.5 billion paid parental leave scheme and fast-tracked infrastructure projects designed to help offset the departure of Holden, or the proposed restoration of expenditures on defence and foreign aid to previous target levels.</p>
<p>Ultimately, government deficits have to be funded by higher taxation on future generations. Deficits raise borrowing costs, which further add to the budget challenge. Also, a larger and larger accumulated deficit reduces the ability of government to provide an effective fiscal stimulus to encounter inevitable future downturns of the economy. So, long term and growing deficits are unsustainable.</p>
<p>Governments, and the electorate, will have to confront major challenges to reduce the unsustainable structural deficits. Lower deficits require a combination of more efficient government expenditures, higher taxation, and reducing expenditures on lower priority projects. General consensus is that improved productivity is available, especially from rationalising commonwealth–state overlaps of education, health, and regulations, but not enough to solve the deficit problem. </p>
<p>Taxation reform, let alone taxation increases (such as expanding the GST), appear to have been deferred pending an inquiry with Abbott promising any changes would be taken to the next election. But by default, a comprehensive review of the reasons for, the structure of, and the delivery of, all government expenditure programs with a longer term horizon has to be a major component of future budgets. The Commission of Audit should provide a strong starting point for this expenditure review task.</p>
<h2>The need to tackle unemployment</h2>
<p>The slow rate of economic growth and higher unemployment (which has risen from 5.4% to <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/6202.0">5.8%</a>) suggest the need for a net contribution of fiscal policy to aggregate demand. Also, the economy is involved in a painful process of significant structural adjustment, and the fall in the terms of trade means a loss of real income. </p>
<p>A short term deficit position could be justified with <a href="http://www.investopedia.com/terms/a/automaticstabilizer.asp">automatic stabilisers</a> only. More contentious is the need for a discretionary fiscal stimulus, especially when monetary policy still has some room to move.</p>
<p>To argue that macroeconomic policy is fine because Australia’s unemployment rate is low by international standards, is an unsatisfactory and lazy conclusion. A more sensible policy question is: can we increase national income, equity and society wellbeing by reducing broadly defined unemployment (that is, the under-employed and workers who have dropped out of job search)?</p>
<p>Treasury and the Reserve Bank of Australia have forecast unemployment to increase to over 6% next year. Another 7.8% of the workforce are classified as underemployed, and wish to work more hours. In addition, the labour force participation rate has been falling, indicating some who would like a job have given up active labour market search. Much could be achieved by reducing unemployment and underemployment, and by raising the participation rate.</p>
<h2>The challenge of all governments</h2>
<p>An important focus of government fiscal policy has to be both to support job creation in the short run and to raise productivity and national income over the longer term. This task requires a focus on the reasons for and the structure of government expenditure and taxation policies. What is the rationale for and the objectives of government intervention in the economy, and how can government programs assist and not hinder private sector restructuring to move labour and capital from declining value-added activities to new higher value opportunities? </p>
<p>These questions are more important challenges for the economic policies of all tiers of government, and fiscal policy in particular, than a simple focus on the bottom line deficit number.</p><img src="https://counter.theconversation.com/content/21507/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Freebairn 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>Media reports preceding the mid year economic and fiscal outlook suggest we should expect a deficit of just under A$50 billion, a further deterioration of Australia’s budget position since the pre-election…John Freebairn, Professor, Department of Economics , The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/188042013-11-04T03:18:17Z2013-11-04T03:18:17ZPotentially less austerity for the troubled Eurozone<figure><img src="https://images.theconversation.com/files/32938/original/m4btqhd7-1381709724.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Could a new method of measuring structural deficits mean easing austerity pressures on troubled Eurozone economies?</span> <span class="attribution"><span class="source">Chema Sanz via Flickr</span></span></figcaption></figure><p>The <a href="http://ec.europa.eu/economy_finance/publications/european_economy/forecasts/index_en.htm">EU Commission’s autumn economic forecasts</a> are due tomorrow. </p>
<p>What makes this event special this year is that there are rumours about a possible change in the Commission’s approach to calculating the so-called ‘output gap’. </p>
<p>An EU <a href="http://europa.eu/epc/working_groups/output_gaps_en.htm">working group</a> has now <a href="http://online.wsj.com/news/articles/SB10001424127887324492604579084744281453818">proposed changes</a> to the calculation of this metric - but these are yet to be approved. </p>
<p>What sounds like a very technical issue could not only have important economic consequences for crisis-affected Eurozone countries, such as Spain, Ireland, Portugal and Greece. It may also have serious political implications for the entire Eurozone.</p>
<h2>New metrics, new policies</h2>
<p>Let’s start by looking at the economic consequences of any sort of change. </p>
<p>The ‘output gap’ is a metric that indicates how far an economy is away from its ‘normal’ level of production. Changing how this is measured has direct consequences for evaluating the fiscal balance of a country. If a country is operating at its ‘potential’, a fiscal deficit is considered to be ‘structural’ and permanent. </p>
<p>The right medicine here is structural reform, such as downsizing the government sector or increasing taxes, thus confirming the appropriateness of the past EU-crisis strategy. </p>
<p>If, however, the crisis economies are found to be operating below their capacity, then the fiscal malaise could be considered ‘cyclical’. Less austerity, and eventually demand-stimulating measures, are then more appropriate.</p>
<p>In short, adopting a new method could trigger a change in policy stance towards less austerity in the Eurozone.</p>
<h2>Is something wrong with the current method?</h2>
<p>Take the example of Spain: The <a href="http://ec.europa.eu/economy_finance/publications/european_economy/2013/pdf/ee2_en.pdf">EU currently estimates</a> Spain’s 2013 production to be just 4.6% below their potential output. But at the same time, 27% of the Spanish workforce is unemployed. How do these figures go together?</p>
<p>An important factor in the EU estimate of potential output is the so-called NAWRU - the ‘Non-Accelerating Wage Rate of Unemployment’. </p>
<p>This is, roughly speaking, the segment of the unemployment figure that is structural. This essentially means that you cannot reduce unemployment without an increased wage inflation because no worker would be willing to take the job offer unless offered a higher wage increase. </p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/32943/original/frkbk7s6-1381710736.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/32943/original/frkbk7s6-1381710736.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=810&fit=crop&dpr=1 600w, https://images.theconversation.com/files/32943/original/frkbk7s6-1381710736.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=810&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/32943/original/frkbk7s6-1381710736.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=810&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/32943/original/frkbk7s6-1381710736.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1018&fit=crop&dpr=1 754w, https://images.theconversation.com/files/32943/original/frkbk7s6-1381710736.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1018&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/32943/original/frkbk7s6-1381710736.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1018&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Spain’s 2013 production was only 4.6% below their potential output, but unemployment still sat at 27%</span>
<span class="attribution"><span class="source">EPA/Emilio Naranjo</span></span>
</figcaption>
</figure>
<p>The EU estimates the NAWRU in Spain to be at 23.7% for 2013, thus classifying almost 88% of Spanish unemployment as structural. The NAWRU was below 12% before the crisis. </p>
<p>Are all of these Spanish workers who have been dismissed over the last few years not willing or qualified to re-enter the labour market once the economy picks up? This diagnosis is hard to believe.</p>
<p>The standard methods of calculating potential GDP and NAWRU are reliable when economies are going through ‘normal’ business cycles. But as they rely, to a certain degree, on averaging more recent data they <a href="http://krugman.blogs.nytimes.com/2013/07/06/potential-mistakes-wonkish/">may not give us the correct information</a> in times of extended and deep economic crises. </p>
<p>Rather, prolonged and deep crisis tends to adjust the NAWRU upward and the output gap downward. In other words, they may bias our diagnosis towards ‘structural problems’.</p>
<h2>What if the problem is not structural?</h2>
<p>In this case the austerity policy of the past would have gone too far. Many economists who are well aware of these diagnosis problems, have argued this for a long time.</p>
<p>For these reasons, the time for less austerity may have come. It would also be in the self-interest of the “enlightened European hegemon against his own will”, aka Germany. Its corporations are increasingly suffering from the recession in the south. And a ‘new calculation method’ could clearly help to communicate to the public in Germany and other austerity-favouring countries that austerity may have run its course.</p>
<p>If the problems are diagnosed as cyclical – and maybe even as having been intensified by austerity policies – this would pave the way to a more rational de-leveraging policy with <a href="http://www.bloomberg.com/news/2013-09-17/imf-says-budget-cutting-needs-speed-limits-even-under-pressure.html">‘speed limits’</a>, and applying the well-known wisdom that fiscal consolidation is best done in times of boom and not in times of crisis.</p>
<h2>Who decides and monitors?</h2>
<p>Whether or not advocates of austerity believe(d) in the structural diagnosis is a different story. But it has undoubtedly been very functional in triggering structural reforms in the problem countries. </p>
<p>The violation of the Stability and Growth Pact (SGP) that limits fiscal deficits to 3% of GDP turned out to be an effective lever to impose reforms. But it also <a href="http://theconversation.com/balancing-stability-and-sovereignty-will-prove-challenging-for-the-eurozone-9581">raises serious concerns about the sovereignty and self-determination</a> of democratic Eurozone member states.</p>
<p>In the first decade of the Eurozone the SGP fiscal criteria have often been violated, especially when Germany and France have not been able or willing to comply. And they got away with it. </p>
<figure class="align-left ">
<img alt="" src="https://images.theconversation.com/files/32941/original/x434y9xb-1381710222.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/32941/original/x434y9xb-1381710222.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=900&fit=crop&dpr=1 600w, https://images.theconversation.com/files/32941/original/x434y9xb-1381710222.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=900&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/32941/original/x434y9xb-1381710222.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=900&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/32941/original/x434y9xb-1381710222.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1130&fit=crop&dpr=1 754w, https://images.theconversation.com/files/32941/original/x434y9xb-1381710222.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1130&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/32941/original/x434y9xb-1381710222.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1130&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The EU Commission will deliver their autumn forecast tomorrow.</span>
<span class="attribution"><span class="source">EPA/Julien Warand</span></span>
</figcaption>
</figure>
<p>The SGP demands the ‘actual’ fiscal deficit to be below 3% of GDP. No corrections for cyclical changes in budget are being made. This leads to the danger that during recessions, a widening deficit would call for ‘deepen-your-recession’ spending cuts or tax increases. Therefore, countries have started to negotiate with the Commission to approve the violation. </p>
<p>Moreover, in good times there were no rules or incentives for fiscal consolidation. Hence, the next recession often brought with it the next SGP violation.</p>
<p>Surely, a limit for a ‘structural deficit’ that makes use of an estimation of the potential production is the better and more rational choice, as it allows countries to react in a flexible manner to booms and busts. Such <a href="http://www.imf.org/external/np/pp/eng/2013/072113.pdf">‘next-generation fiscal rules’</a> are desirable from an economic point of view. In this sense the <a href="http://ec.europa.eu/economy_finance/articles/governance/2012-03-14_six_pack_en.htm">new EU fiscal compact</a> that demands a 0.5% limit on the structural deficit should be welcomed. </p>
<p>However, even more than the ‘actual deficit’ metric, structural measures are vulnerable to creative ‘adjustments’. This can gear policies either towards more structural reform or less austerity.</p>
<p>It is therefore important that independent fiscal councils are involved in the final evaluation of what is structural and what not. The <a href="http://www.imf.org/external/np/pp/eng/2013/072113.pdf">debate on this issue has only just started</a> and involves difficult questions of how to design an effective fiscal governance system. </p>
<p>These issues are even more complex for the Eurozone as both national and supranational players are involved.</p>
<p>The real challenge for Eurozone deleveraging is not only to return to sustainable fiscal balances, but to do it without compromising the self-determination and sovereignty of member countries. At the same time it must be ensured that, in future, countries comply with the fiscal obligations they have agreed to.</p>
<p>In this sense, we should look forward to reading tomorrow’s autumn economic forecast with great interest.</p><img src="https://counter.theconversation.com/content/18804/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Harald Sander 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 EU Commission’s autumn economic forecasts are due tomorrow. What makes this event special this year is that there are rumours about a possible change in the Commission’s approach to calculating the…Harald Sander, Professor of Economics at Maastricht School of Management and Professor of Economics and International Economics, Cologne University of Applied Sciences (CUAS)Licensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/139872013-05-09T02:35:25Z2013-05-09T02:35:25ZDebts and deficits: why a string of deficits does not necessarily spell the end of the world<figure><img src="https://images.theconversation.com/files/23337/original/9nb7bkfv-1367976263.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">What is the "optimal" level of public debt? Persistent deficits do not automatically lead to a situation where the government resembles a household under mortgage stress.</span> </figcaption></figure><p>The debate about long-term public finance and the role of government is one that is most definitely needed. However, there are two aspects to this debate that are often conflated.</p>
<p>First, there is the issue of a sustainable public debt to GDP trajectory. It is here that the issue of the optimum size of the budget balance and whether deficits are sustainable in any sense arises.</p>
<p>The second aspect of debate about public finance and the role of government is the composition of the budget: the mix of expenditures and revenues required to achieve budget targets – be they deficits or surpluses – consistent with sustainable debt ratios.</p>
<p>As to the first of these – a sustainable debt trajectory – the first thing to note is that the time-path of the debt to GDP ratio depends on four things: the size of the budget balance (whether surplus or deficit) and whether the government needs to issue more debt in response to the budget; the starting level of debt; the interest rates effectively payable on the debt; and the growth rate of the economy.</p>
<p>For a sufficiently small debt-to-GDP ratio and a plausible range of interest rates payable on the debt and growth rates of the economy, the debt will not grow faster than GDP so that the debt ratio remains constant over time or declines, even with persistent budget deficits.</p>
<p>Indeed, as one economist, Luigi Pasinetti, <a href="http://ideas.repec.org/a/oup/cambje/v22y1998i1p103-16.html">noted some years ago</a>,: “It is possible to remain [in a situation] where the public debt is either constant or decreasing [as a proportion of GDP], even with a permanent public deficit, provided that GDP growth is positive.” </p>
<p>Persistent deficits — either before interest payments on debt are taken account (economists call this the primary budget balance) or after they are taken into account need not lead to an outcome where the government resembles a household under mortgage stress.</p>
<p>This is the flawed analogy often used in political debate— and it needs to be roundly knocked on the head. A primary budget surplus or even balanced budget is not always a necessary condition for public debt to stabilise or fall as a proportion of GDP. This really does depend on the four factors referred to above.</p>
<p>Pasinetti also noted that the “optimal” amount of public debt as a proportion of GDP is not something that economists can pinpoint. </p>
<p>Economists can tell you the conditions under which the debt will or will not grow faster than GDP. But there is no economic argument – certainly that I’m aware of – which points to 30% debt to GDP being less desirable that 15%, for example. Nor is there an economic justification for the nonsensical default view that has underpinned political discussion in this country for many years: that the best public debt is no debt.</p>
<p>The desirable debt ratio must be considered in light of the kinds of economic and social infrastructure that are funded through that debt. In other words, the optimal debt level is much more than just an economic decision.</p>
<p>However, there is a qualification to be made here. There is a view put by Keynes many years ago that the recurrent side of the budget should be balanced, while deficits — if needed — should be left to capital expenditure side of the budget. Part of this view is the notion that the returns on the capital expenditures — both economic and social — take place in a longer timeframe.</p>
<p>For Keynes, this was also about ensuring public investment was free to meet any deficiency between investment that the private sector wanted to undertake and the level required to bring an economy to full employment.</p>
<p>So,although the overall size of a budget balance and its time profile may not be inconsistent with constant or falling long-term public debt to GDP ratio, a government may face difficult financing issues in funding burgeoning recurrent expenditures.</p>
<p>If, for example, the implications for recurrent funding of an NDIS or Gonski school reforms are likely to exceed revenue projections, questions of creating additional revenue streams or of cutting in other areas of recurrent expenditure may appear prudent.</p>
<p>And herein lies the second aspect to the debate about public sector financing: revenue versus expenditure.</p>
<p>A not-so-subtle theme in much discussion in this country for a long time has been a predilection for expenditure cuts in favour of tax changes. This reflects some fundamental views about how the economy works – views, which, in the view of the present author, are erroneous.</p>
<p>Clearly, there are also matters of equity at stake in the revenue and expenditure mix: that expenditure on social infrastructure (as embodied in the NDIS or Gonski) and increasing of taxes or imposition of levies to finance these measures involve justifiable redistributions.</p>
<p>Leaving equity issues aside though, even on economic grounds there is little or no justification for seeing budget difficulties – to the extent they are difficulties – as symptomatic of excessive expenditure rather than insufficient revenue.</p>
<p>This can only be justified on the grounds that government expenditures either capital or recurrent in and of themselves somehow lead to a diminution of wealth in the economy, which more than offsets the social benefit which might arise from the provision of government services.</p>
<p>It is a view that ignores the most basic economic concepts about how income and economic activity are generated in an economy like ours, and that governments are as capable as the private sector of generating effective demand and growth. Such a view too often also ignores a need for the revenue system to be one that serves society’s economic and social needs, rather than a plaything of the private sector.</p><img src="https://counter.theconversation.com/content/13987/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Graham White 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 debate about long-term public finance and the role of government is one that is most definitely needed. However, there are two aspects to this debate that are often conflated. First, there is the issue…Graham White, Associate Professor, School of Economics, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/137822013-04-29T04:10:47Z2013-04-29T04:10:47ZAbbott’s budget bluster highlights a deficit of social responsibility<figure><img src="https://images.theconversation.com/files/22980/original/wnknq248-1367207429.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Tony Abbott's attack on Australia's debt and taxation levels is sorely misguided. </span> <span class="attribution"><span class="source">AAP/ Alan Porritt</span></span></figcaption></figure><p>Today’s announcement by the government that it has a <a href="http://www.afr.com/p/national/budget_hole_hits_billion_yqfWXLNpFRgxMBo5STJCxL">$12 billion “black hole”</a> had the status of a confession. It needn’t have. All talk of “black holes”, “revenue shortfalls” and “structural deficits” remains trapped in a rationalist approach to economics, which is being increasingly discredited around the world.</p>
<p>The rationalist, or neoliberal, approach assumes that budgets simply must be balanced – or preferably in surplus – most or all of the time. It’s an inherently conservative approach that denies governments the possibility of going into deficit to fund expensive, long-term infrastructure projects which will have overwhelming benefits for the community. It’s the approach taken by the Tony Abbott-led Opposition, which is telling everyone who will listen that Australia must “urgently” redesign its budget so as to “live within our means”. The two biggest problems, according to Mr Abbott, are Labor’s debt and high taxes.</p>
<p>Not only is this simply rubbish, but the experience of the rest of the world suggests that it is also economic madness. We can see the flaws in Mr Abbott’s arguments by looking at the figures. Public debt in Australia is not a problem. The <a href="http://www.imf.org/external/pubs/ft/weo/2012/02/weodata/weorept.aspx?pr.x=47&pr.y=12&sy=2012&ey=2012&scsm=1&ssd=1&sort=country&ds=.&br=1&c=512%2C446%2C914%2C666%2C612%2C668%2C614%2C672%2C311%2C946%2C213%2C137%2C911%2C962%2C193%2C674%2C122%2C676%2C912%2C548%2C313%2C556%2C419%2C678%2C513%2C181%2C316%2C682%2C913%2C684%2C124%2C273%2C339%2C921%2C638%2C948%2C514%2C943%2C218%2C686%2C963%2C688%2C616%2C518%2C223%2C728%2C516%2C558%2C918%2C138%2C748%2C196%2C618%2C278%2C522%2C692%2C622%2C694%2C156%2C142%2C624%2C449%2C626%2C564%2C628%2C283%2C228%2C853%2C924%2C288%2C233%2C293%2C632%2C566%2C636%2C964%2C634%2C182%2C238%2C453%2C662%2C968%2C960%2C922%2C423%2C714%2C935%2C862%2C128%2C135%2C611%2C716%2C321%2C456%2C243%2C722%2C248%2C942%2C469%2C718%2C253%2C724%2C642%2C576%2C643%2C936%2C939%2C961%2C644%2C813%2C819%2C199%2C172%2C733%2C132%2C184%2C646%2C524%2C648%2C361%2C915%2C362%2C134%2C364%2C652%2C732%2C174%2C366%2C328%2C734%2C258%2C144%2C656%2C146%2C654%2C463%2C336%2C528%2C263%2C923%2C268%2C738%2C532%2C578%2C944%2C537%2C176%2C742%2C534%2C866%2C536%2C369%2C429%2C744%2C433%2C186%2C178%2C925%2C436%2C869%2C136%2C746%2C343%2C926%2C158%2C466%2C439%2C112%2C916%2C111%2C664%2C298%2C826%2C927%2C542%2C846%2C967%2C299%2C443%2C582%2C917%2C474%2C544%2C754%2C941%2C698&s=GGXWDG_NGDP&grp=0&a=">ratio of public debt to GDP is about 27%</a>, compared with an average of about 90% for developed economies. And Australia is well down the list of <a href="http://www.economist.com/blogs/graphicdetail/2012/10/focus-4">effective taxation rates</a> among OECD nations.</p>
<p>Indeed, on standard economic measures, Australia is not only performing better than the rest of the world, but performing better now under Labor than it was when Labor took office from the Liberal-National Coalition in 2007. Since then, GDP per capita has <a href="http://www.tradingeconomics.com/australia/gdp-per-capita">climbed 13%</a>. Real wage levels have <a href="http://www.tradingeconomics.com/australia/wages">increased 27%</a>. Household savings have <a href="http://www.tradingeconomics.com/australia/personal-savings">more than doubled</a>. Labour productivity is now at an <a href="http://www.tradingeconomics.com/australia/productivity">all-time high</a>, and is a clear eight index points higher than in 2007. </p>
<p>Pension levels; superannuation; international credit ratings; the value of the Australian dollar; industrial production growth; foreign exchange reserves; the balance of trade; the current account as a percentage of GDP; the government ten-year bond rate: on <a href="http://www.tradingeconomics.com/australia/indicators">all these measures</a>, Australia has improved its economic situation since 2007, while the rest of the world has moved in the opposite direction. </p>
<p>Perhaps most strikingly, the national interest rate, which according to Liberal Party propaganda is always lower when it’s in government, is now 3%, <a href="http://www.tradingeconomics.com/australia/interest-rate">compared with an average of 6%</a> under the Howard government. And five years on from the global financial crisis, Australians are living with an unemployment rate of 5.6%, compared with well over 7% in Canada, the USA and Britain.</p>
<p>Anyone listening to Mr Abbott would assume that Australia is on the verge of economic ruin. In essence, Abbott has told us that we’re at real risk of going the way of Europe unless we elect him to “stop the taxes”.</p>
<p>The reason Mr Abbott’s strategy has worked to date is that problems do exist for people, but not in the way that he portrays them. Economic indicators might suggest that we’ve never had it so good, but the hardship felt in the suburbs tells a different story. The folly of three decades of free-market ideology is now obvious: families tethered to unaffordable mortgages; new suburbs underserviced by public transport and infrastructure; a public education system so run-down that it forces parents into the private system. It is the dissatisfaction with these outcomes that Mr Abbott is tapping into, but he’s proposing the wrong solutions.</p>
<p>We’re now seeing two consequences of neoliberal economic rationalism in practice. Firstly, there are huge structural deficits, not in the budget but in social infrastructure. The hollowing out of the public institutions favours the bottom-line profits of existing corporates, but relegates government to the role of mere manager. The privatisation we never talk about is that of risk, as our pension plans have now been opened to the vagaries of the stockmarket. Housing becomes less affordable. Public transport becomes less universal and less, well, public. Governments find it increasingly difficult to draw up meaningful budgets, as revenues are tied to fluctuating international demand for export commodities. </p>
<p>The gap between the richest and poorest in deregulated, privatised societies has <a href="http://www.socialinclusion.gov.au/resources/financial-stress-and-inequality">grown wider, as it has in Australia since the mid-1990s</a>. And the concept of a public sphere is all but gone, a whole generation growing up in a world in which they’re encouraged to think only about how to succeed for themselves in a game whose rules have been dictated by massive corporate interests.</p>
<p>The second, more immediate, consequence of neoliberal theory in practice can be seen in the effects of Europe’s embrace of the austerity doctrine in the wake of the GFC. First, in 2008, the consequences of too much “deregulation” in the global finance industry became apparent when thousands of low-income earners had to walk away from their homes after their so-called “low-doc” loans were revealed as toxic assets on the imaginary books of financiers. The subsequent collapse of globally significant companies led to a cessation in the flow of liquid capital, which then turned national debt into disastrous impending liabilities for countries across Europe and elsewhere.</p>
<p>Initially, proponents of the neoliberal orthodoxy tried to shoot the blame home to those who hadn’t properly listened to their prescriptive advice. The problem was not too much deregulation; it was that too much regulation remained in the finance and other industries. And if governments hadn’t tried to fund their expenditure with debt, they wouldn’t be in strife. Rather, governments should have pursued budget surpluses at all costs, to ensure that public spending remained less than public revenue. Given that the proponents of neoliberalism had also been arguing for massive decreases in taxation on corporate profits and personal income, the cuts to public spending they required had to be deep and dramatic.</p>
<p>By about 2009-10, governments had a stark choice: either accept the prescriptions for rationalisation and cut spending deeply, or try to tackle their looming fiscal crises with pro-growth strategies which would hopefully work to simply inflate the debt away. The choice was framed as the ultimate battle of the century between two dead economists: Milton Friedman and John Maynard Keynes.</p>
<p>Governments responded in one of three different ways. The first, which was the response of the European governments, was to continue to adopt the so-called “free market” mantra and impose severe austerity on their populations with the aim of bringing national debt under control. The second, which was the response of the Australian government, was to pour public dollars into key growth industries (such as construction), which would hopefully tide the economy over until consumer and business confidence recovered. The third, which was the American response, was to be caught hopelessly betwixt and between these approaches — a consequence of a Congress which wanted the former and a President who wanted the latter.</p>
<p>Five years on from the global financial crisis, we have the provisional results of these strategies. Europe has not recovered. Its public debt has crystallised into a real problem because, in an environment of structurally low economic growth and hence inflation, governments cannot rely on price increases over time to in part inflate that debt away. Europe is now facing another desperate choice: does it continue to attempt to repay the debt (which means more cuts and no more spending – and no more growth), or does it default on the debt, which would presumably cause havoc on the international money markets?</p>
<p>The United States is seeing a very slow recovery. Unemployment remains persistently high, and there’s not much more that can be done from a monetary perspective because the interest rate is about as low as it can go. That country also faces a choice: does it go the way of Europe and cut public spending, or does it risk the inflationary bogeyman and stimulate the economy with debt-funded public spending?</p>
<p>On any sensible analysis, then, the unorthodox approach by the Australian government has been well and truly vindicated. It’s worth pausing to ask why we’re about to turf the Labor Party out of government, in favour of the Liberal Party led by a man who continues to insist that the problems are debt and high taxes. Of course, Labor hasn’t helped itself: for years Wayne Swan was running around the country promising a surplus come hell or high water. Only recently has he begun to explain that cutting spending will only invite unemployment and a recession.</p>
<p>Politicians and other non-economists have for too long deferred to economists who insist that policy must be dictated by neoliberal “truths”. But the thirty-year neoliberal experiment is drawing to a close. The time is now well and truly nigh for a reinvigoration of strong institutions of state, to encourage common civic-mindedness in the population, to begin work on the massive backlog of neglected infrastructure projects, and to ensure that the most valuable of all 20th-century inventions – the welfare state – is not further corroded by more implementation of ossified economic theory. </p>
<p>In Australia, as the election approaches, we need to be asking all candidates just how they will respond to these new economic realities. Unfortunately, much of the discourse remains trapped in an empirically unsound regurgitation of neoliberal dogma about “structural budgetary deficits”. To the contrary, Australia should be using its AAA credit rating, the low price of money and its very sound public debt levels to borrow in order to fund much-needed social programs and public infrastructure.</p><img src="https://counter.theconversation.com/content/13782/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Russell Marks works for the Victorian Aboriginal Legal Service which is funded primarily through the Victorian Attorney-General's Department. He has previously worked for three Victorian universities, and received a scholarship by way of a public grant through the Australian Research Council and La Trobe University for a doctoral thesis.</span></em></p>Today’s announcement by the government that it has a $12 billion “black hole” had the status of a confession. It needn’t have. All talk of “black holes”, “revenue shortfalls” and “structural deficits…Russell Marks, Honorary Research Associate, School of Social Sciences, La Trobe UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/137232013-04-28T20:05:13Z2013-04-28T20:05:13ZFederal Budget 2013: Why our unsustainable structural deficit must be tackled<figure><img src="https://images.theconversation.com/files/22890/original/b74khnn4-1366942755.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Governments have been increasing expenditure, despite shrinking tax revenues. But our structural deficit is unsustainable and must be tackled.</span> <span class="attribution"><span class="source">Image sourced from www.shutterstock.com</span></span></figcaption></figure><p>All Australian governments, and ultimately all Australians, are faced with making tough decisions in their budgets. Without significant reductions in government expenditures and the services they provide or an increase in taxation to fund government expenditures, current policies will lead to larger and larger structural budget deficits. </p>
<p>For example, <a href="https://theconversation.com/australian-governments-face-a-decade-of-budget-deficits-13616">the Grattan Institute projects</a> a combined structural deficit for the Commonwealth and the states (and territories) of at least 4% of national income, or $60 billion a year, by the early 2020s. </p>
<p>Another report from modelling firm Macroeconomics, commissioned by the <a href="http://www.minerals.org.au/file_upload/files/publications/roadmap_for_fiscal_sustainability_WEB.pdf">Minerals Council of Australia</a>, also predicts decades of <a href="https://theconversation.com/its-the-structural-deficit-stupid-1084">structural deficits</a> unless governments rein in their outlays. </p>
<p>An increasing structural deficit is inconsistent with the bi-partisan policy of budget balance over the economic cycle; it is unsustainable; and it threatens the ability of governments to assist the economy to recover from inevitable future international and domestic shocks.</p>
<p>Recurrent expenditure by the commonwealth and state governments in 2012-13 is about $500 billion, or 33% of GDP.</p>
<p>Intergenerational reports prepared by the Commonwealth and by some of the states project government expenditure share will increase over the next few decades under current policy programs. </p>
<p>With higher incomes and new technology, Australians are demanding more and more health expenditure, with most funded by governments; ageing of the population is considered to be a relatively small contributor to higher health costs. </p>
<p>The Grattan Institute projects an increase in government expenditure on health by the early 2020s of about the equivalent of 2% of GDP; and this is similar to the increase over the past decade. </p>
<p>Full implementation of the NDIS would be a major additional expenditure. </p>
<p>Ageing of the population is projected to increase welfare payments and aged care, even after allowing for the build-up of pre-paid superannuation. Proposed increases in parenting payments, Newstart, and so forth would add further to welfare outlays. </p>
<p>Government expenditure on education is expected to increase as a share of GDP, and more so if initiatives such as the Gonski proposals are implemented. State governments face a large backlog of expenditure on infrastructure for growing populations. Most other government expenditures, including on defence, law and order, are projected to draw about current shares of GDP in the future.</p>
<p>Most, if not all, current and proposed government expenditures are valued by citizens. However, their provision involves an opportunity cost of labour and other resources reallocated from private sector expenditures on food, housing, recreation, and so forth. Taxation is the process for this reallocation of income from private to public expenditure.</p>
<p>Taxation revenue as a share of national income has fallen from about 34.5% in 2007-08 to a low of just above 30% in 2010-11 and about 32% in 2012-13 for a number of reasons. Changes to the personal income tax rate schedule by each of the Howard, Rudd and Gillard governments, reduced personal income tax. Lower capital gains tax post the GFC also is likely to continue. </p>
<p>Company income tax has declined with slower growth of corporate incomes, and with increased depreciation allowances associated with the mining investment boom. Indirect tax revenues as a share of GDP have fallen in the case of the GST, due to an increase in the household saving ratio and also to tax base exemptions for income elastic products; from non-indexation of the petroleum excise rates; and the end of the property boom has reduced conveyance duty. </p>
<p>Revenue from the minerals resources rent tax has been much smaller than projected, and it seems likely that revenue from the carbon tax (or more accurately the sale of emission permits) will fall from 2015-16.</p>
<p>In the real world of economic cycles the ever widening gap between an increasing government expenditure share and at best a constant taxation share of national income prepared under average economic circumstances shown in the intergenerational reports and the Grattan Institute is likely to underestimate the budget deficit. </p>
<p>An economic downturn, either with international and domestic causes (or both), almost certainly will occur in the future as in the past. Downturns result in larger fiscal deficits and new expenditures which prove difficult to unwind.</p>
<p>Over the longer run, fiscal deficits, and more importantly increasing fiscal deficits, are unsustainable. They incur higher debt interest payments; higher interest rates for private sector investors; reduced flexibility and effectiveness in responding to economic recessions and crises; and their eventual repayment becomes higher taxes and imposts on future generations.</p>
<p>Governments at all levels and of all colours must involve themselves and the public in a serious policy discussion of how to turn around the trend to rising and unsustainable budget deficits. Improving government productivity, for example by reducing wasteful overlapping of commonwealth and state programs for education and health, can assist, but it would not be enough to bridge the gap. </p>
<p>Ultimately, a revaluation of different expenditure programs and their options and/or higher taxation will be required. The mix of tax increases and expenditure reductions require society to make judgements about the relative roles of government and the private sector, and about the relative merits of more or less limited income and resources allocated to government goods and services versus private sector provided goods and services.</p><img src="https://counter.theconversation.com/content/13723/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Freebairn 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>All Australian governments, and ultimately all Australians, are faced with making tough decisions in their budgets. Without significant reductions in government expenditures and the services they provide…John Freebairn, Professor, Department of Economics , The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.