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July 2005 | |
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Interview: Battle Stations Unions: The Workers, United Politics: The Lost Weekend Industrial: Truth or Dare History: A Class Act Economics: The Numbers Game International: Blonde Ambition Training: The Trade Off Review: Bore of the Worlds Poetry: The Beaters Medley
The Soapbox The Locker Room Culture Parliament
After the Action
 Workers Give In FNQPower and the PassionMao and ThenThe Third Way Hits A Dead EndUnfair For AllWhat Is To Be Done?Black Hawk Up
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Economics The Numbers Game
************* When I hear a government announcing its annual budget I usually ask the following questions: 1. How appropriate is it for the macroeconomic conditions? The primacy of this question reflects the standard 'Keynesian' view that budgets should contribute to macroeconomic stabilisation - ironing out the cyclical pattern of booms and slumps to which capitalist economies have always been prone. On this reasoning, when economic growth is slowing (as is currently the case in Australia) one would expect the government to budget for a deficit (or at least a reduced surplus) in order to stimulate the economy. The problem now is that deficits (or even reduced surpluses) are seen by the orthodox (non-Keynesian) economic commentators as indicative of inefficient government economic management. That throws effectively the whole of anti-cyclical macro policy onto monetary policy - the periodic adjustment of interest rates by the Reserve Bank. This is unfortunate because monetary policy is the 'heavy blunt instrument' in the armoury of economy policy, tending to cause much social damage when rising interest rates impact adversely on house-purchasers and business investors. If the economy does slip towards recession then the budget tends to go into deficit anyway (as the government's tax receipts fall and its expenditure on unemployment benefits rise). So budgetary policy does interact with the macroeconomic conditions, one way or the other. Better to make the policy explicit and purposeful rather than incidental. At present, the economic situation is on a bit of a knife-edge. Much depends on whether the US economy shifts from boom to slump: many economic commentators are warning that its current trade deficit is not sustainable, and therefore that something has to give. Only about 2% growth in the Australian economy is forecast for the year ahead, but even that modest rate of growth is uncertain. 2. What impact does it have on the distribution of income? Budgeted changes to either taxes or expenditure patterns always have distributional consequences. So 'who gets what?' is an obvious question to ask about a budget, although it is sometimes difficult to discern the net effect of multiple changes. Some aspects are clear enough though. Reductions in income tax, for example, reliably benefit the higher income groups. This even applies to raising the tax-free threshold or cutting the tax rates on low levels of income because such cuts actually have much greater benefits for people on the higher marginal tax rates. Cuts in income tax rates for lower incomes are always worth more, in absolute dollar terms, for higher income earners. So this invariably causes more inequality in after-tax incomes. Incidentally, there is no evidence that income tax cuts have a positive impact on work and productivity. As every economics textbook points out, the net effect of a tax change depends on the relative size of income effects (ie. less work needed to generate the same income after tax) and substitution effects (people substituting work for leisure as a result of the tax cut). Policies claiming to increase 'incentives' are usually more about redistribution (from poor to rich) in practice. 3. What social priorities does the budget embody? Budgets reflect the government's social agenda. So, first and foremost, how much does the government want to divert spending from individuals to society as a whole, ie. by prioritising better social services over tax cuts? Second, what are the public spending priorities? Defence spending or university funding? Expenditure on child care or pensions? Public housing or business subsidies? A budget is an essentially political document. It impacts not just on the distribution of income, but also indicates which groups are to be socially encouraged and which will be subject to more authoritarian control by government eg. as the result of tighter eligibility requirements for people dependent on social security payments. Fiscal policies also reflect ideological commitments. The privatisation (sell-off) of Telstra for example, is likely to impact adversely on the prices and the quality of services to non-metropolitan users of communication services if commercial criteria swamp community service obligations in the privatised corporation. How much weight is put on those social costs affecting rural communities is a political judgement. 4. How will it affect the relationship of the national economy to the rest of the world? Budgets are primarily about managing the national economy, but they also have the capacity to affect external trade and capital flows. This is very important in the modern Australian context because the policies pursued by both ALP and Liberal-National governments over the last 33 years have reduced barriers to international trade and capital movements. So, if the budget boosts domestic consumer spending (eg. by cutting income taxes) that predictably increases spending on imported goods and thereby increases the current account deficit. Australia's ballooning current account deficit is a major problem. It requires massive capital inflow - and therefore ever growing dependence on foreign investment - to produce a 'balance of payments'. A government concerned about this problem could introduce selective industry and trade policies. But such policies are apparently unacceptable to governments imbued with an 'economic rationalist' belief in the virtues of the free market. 5. Will it contribute to a better quality environment? Budgets can be used for the pursuit of environment goals, if governments are so inclined. The introduction of a 'carbon tax', for example, would tax goods according to the amount of non-renewable energy resources that go into their manufacture. That would discourage production and consumption of those goods. It would be preferable, from an ecological perspective, to a 'non-discriminatory' tax such as the Goods and Services Tax (GST), for example. Adjustments to petrol excise can have similar effect. Governments can also steer investment into more ecologically-sustainable forms, eg. through subsidies to industries developing and using solar-power technology. Therein lies an opportunity to link environmental goals with policies to increase exports and reduce the nation's current account deficit. Whether a government implements such a policy is a political choice.
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