This Submission relates to Chapter 1: Building Australia’s Prosperity – Prudent fiscal and monetary policy
12. Labor will deliver sound public finances by adhering to a fiscal strategy that achieves a balanced budget on average over the economic cycle. Labor will take a responsible approach that supports growth, jobs and invests in future prosperity while strengthening public finances.
13. Labor will deliver a progressive and sustainable tax system... guaranteeing adequate revenue to fund quality public services, bring about a more equal distribution of income and wealth … (etc).
These policy statements reflect Labor’s adherence to what is a widespread inaccurate and obsolete understanding about how a modern economy actually works. Most of us still have a near superstitious view of economics. The ALP and the Liberal/National neoliberal mob have shared this unfortunate view at least until recently, apparently.
The Government, ominously for Labor, has shown signs that it is beginning to wake up. The Media, most of which is very Liberal/National in orientation, has in recent months included articles about Modern Monetary Theory. Are the Liberal/National mob about to ditch their ‘ balance the budget’ fetish and wrong-foot Labor?
Labor’s Fair Go seeks to deliver a decent pension, Medicare, a proper dealing with National Disability, high-quality aged care, schools, skills, TAFE and university access, care for the environment, address Indigenous disadvantage and much more.
Delivering a Fair Go or indeed being elected to Government is improbable while adhering to an economic agenda that is seriously out of date.
“…. Labor had decided well before the election to commit large amounts of taxpayers’ money to new spending initiatives. ….more than $100 billion. Having decided to spend this much more than the Coalition, Labor faced two choices: increase the budget deficit and public debt by the same amount or announce new revenue-raising measures to cover the cost.” Review of Labor’s 2019 Federal Election Campaign Page 17
About this submission
The following discussion is a summary of the basis and principles of a modern economy and how it works since the Gold Standard was abandoned in the 1970’s. Modern Monetary Theory provides a very detailed description of its workings.
A complete description and analysis is not possible in the space afforded to a submission like this. An internet search will provide full details and discussions. I have used bold type and italics to suggest where to search rather than providing links.
Australia is a Sovereign Currency Nation
The Australian Government uses its own currency. Much of the World does this too. European Union Countries – 28 of them, use the Euro. State and Local Governments cannot issue currency and rely on transfer payments from the Australian Federal Government, State and local taxes, stamp duties, rates, etc.
Australian Government spends by crediting the reserves of a commercial bank which are held at the RBA (Australia’s central bank), and having the commercial bank credit the bank account of the beneficiary of that spending. Money enters the system when the government spends it into existence. ‘A central bank simply creates new money at the stroke of a computer key’.
A Sovereign Currency country doesn’t borrow in foreign currencies or peg its currency to any other, spends and taxes only in its own currency, which floats against other currencies: and the central bank sets policy interest rates.
Government spending is not constrained by inflation. It is constrained by the capacity of the real economy. When spending (either by the private sector and/or the government sector) exceeds the capacity of the real economy, inflation increases. The real economy is the output of the underlying economy itself. Real wealth is assets, savings, goods and services. The only constraints that a currency-issuing government, such as the Australian government faces, are how many real goods and services are available for sale in $A.
Taxation supports demand for the currency
The Australian Government requires that its taxes are paid only in $A, ensuring acceptance of its currency.
A Sovereign Currency Government issues the currency and it must first spend it by crediting private bank accounts before it can tax – by debiting bank accounts. Sovereign Currency Governments spend first and tax afterwards. The Australian Government’s capacity to spend is independent of taxation.
Taxes should be all about public purpose and should never be about raising revenue.
Tax is all about the social consequences – the total impact of each tax on the real economy and on people’s well-being. In a modern economy, spending and taxing are economically separate activities.
Taxes can be levied to curb inflation or to advance economic issues or address social issues, stimulate research and local manufacture and much more. All taxation should be regarded from the point of view of social and economic consequences.
A core principle of tax design is neutrality: ensuring that taxes depend on behaviour as little as possible. Keeping tax as low as is necessary mitigates tax dodging. When the cost to avoid a big tax bill involves mobs of records, tax accountants, lawyers and even off-shore havens, then it will often be a better choice is to pay it, not dodge it.
Keep it simple and as small as necessary to achieve its fundamental purposes, which have nothing to do with raising revenue to spend.
As long as the 1940’s or earlier, society’s myths about money and taxes were beginning to be challenged. An excellent ‘wake up’ was given in a speech given to the American Bar Association in 1943 by The Federal Reserve Bank of New York chair, Beardsley Ruml:-Taxes for Revenue are Obsolete. Australia and much of the rest of the world needs to get up-to-date (or at least into the 21st century).
Debt and ‘Balanced Budgets’
Australia issues its own currency, $A. It can run a pure deficit, without borrowings. Instead, it has been decided (politically) that … fund any budget deficit by issues of securities .. A Budget Surplus is essentially meaningless – it is just the amount by which the proposed receipts – taxes, excise etc – will exceed proposed expenditure in a particular year or time scale.
Debt is the amount owed at any point in time—what has been borrowed and not paid back. Australia issues its own currency, $A. It can run a pure deficit, without borrowings – so there is no “debt’. Bonds issued in the past are repayable only in $A and this is done at the stroke of a computer key,
A Sovereign Currency Nation’s government like Australia’s primary purpose is to improve the well-being of its population. Balancing budgets is an irrelevant and destructive blind alley. The real economy is what is relevant to well-being, care for the environment, defence, research education, aged-care and employment (and so much more).
Growth in the money supply is critical for economic growth, and there are only two ways that the money supply can grow in a fiat currency system – Government spends more than it collects – runs a deficit or by private credit growth.
Australia’s Sovereign currency-issuing Government can issue debt-free money – and in reality it does this already. The RBA has purchased a total of $A40,250 million worth of Australian government bonds already and it proposes to purchase $100 billion more in the near future.
“The Reserve Bank has been injecting substantial extra liquidity into the financial system through its daily market operations. In March 2020, the Bank announced it would conduct regular one-month, three-month and six-month maturity repurchase operations as long as market conditions warranted…”
….our plan to buy $100 billion of government bonds over the next six months will help people get jobs and support the recovery of the Australian economy. Philip Lowe Governor Reserve Bank of Australia Sydney – 3 November 2020.
If the Government’s own Reserve Bank can conduct maturity repurchase operations to buy back the government bonds it has itself issued, it makes no sense to fund any budget deficit by issues of securities. Bonds issued in the past are repayable only in $A and this is done at the stroke of a computer key
Since 1971 when Bretton Woods and gold convertibility was abandoned, currency issuing Governments do not need to borrow the fiat currency their central bank creates by normal balance sheet operations. This means that taxes and bond sales do not fund government spending.
A Job Guarantee (JG)
A ‘fair go’ will require a Job Guarantee (JG): an economic policy proposal to solve inflation and unemployment. Its aim is to create full employment and price stability. The state hires the unemployed if there is no other work available or they choose to take a JG job instead.
Distinguished British economist John Maynard Keynes, as long ago as the 1930’s wrote : ‘… outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes.’ https://www.investopedia.com/terms/k/keynesianeconomics.asp ’
A Job Guarantee would be an automatic stabiliser that ensures that the Government is doing the necessary amount of spending where it is needed in the right places and right time to achieve full employment with stable prices. When the private sector is recovering, federal government spending would automatically fall as people leave the Job Guarantee for higher paid jobs elsewhere. When the private sector experienced a downturn, federal government spending would automatically increase as people lose their private sector jobs and enter the Job Guarantee.
The Australian Government should fund and control the JG program with on-going engagement and participation by Australia’s State and Local Governments and Community Councils
Australia’s Job Guarantee Program should be managed at local area or even neighbourhood levels and administered by an Australian Government Department, the culture and emphasis of which would focus on its reason for existence – to serve the needs of the environment, community, and people and to enhance the public good.
Each area’s Program must be managed and supervised by appropriately qualified people – a well paid, sought-after job.
A Job Guarantee’s management and some of its day to day work allocation and supervision would require additional staffing at Local levels with staff engaged by the State, Local or Community Council or perhaps also by a Statutory Authority on an on-going basis. This funding should also be funded by the Australian Federal Government.
The JG should be integrated into a coherent training framework.TAFE and perhaps less often University training along with private enterprise business offering specialist courses in, e.g. truck and plant driving and operation need to be provided with the JG framework.
Examples of Job Guarantee projects and jobs
- Fire load reduction to mitigate bushfire risk, including indigenous Fire Management practices – ( On-going management permanent – JGs supplement and augment)
- Noxious Weed eradication – rabbits, foxes, deer pig etc: rubbish removal on beaches and in waterways
- Community gardens, particularly in remote areas – good tucker for kids, aged, deprived.
- Enhanced care of National Parks, recreation areas, sporting facilities, school premises and streets and neighbourhoods generally. ( On-going management permanent – JGs supplement and augment)
- Indigenous health, nutrition, social and other problem areas – Care for Country.- Indigenous Fire Management practices. ( On-going management permanent – JGs supplement and augment)
- Restoration and maintenance of native grasslands, forests, streams etc
Some possibilities after adoption of the measures outlined above
- Provide a Job, not ‘benefits. – A JG does away with the mind-blowing and administratively wasteful and expensive Centrelink requirements …. JobKeeper Payment .. part of your taxable income … must report any JobKeeper Payment income you or your partner get. … pay you too much and you may get a Centrelink debt….. meet mutual obligation requirements if you get JobKeeper Payment and an income support payment. … supporting people while they look for work. Jobactive, is all outsourced.
- Get rid of sham “contracting” GIG economy: Uber Deliveries etc. JG will ensure that nobody has to work in unsafe, poorly paid and exploitative jobs.
- Pay the Pension, regardless of income or assets, to anyone lawfully resident in Australia- or able to return to Australia after temporary residence overseas when they reach,say, 65. The ‘cost’ of paying the well-off is largely offset by doing away with Centrelink.
- Pay those who are unable to work a pension similar to that suggested for Age Pensions directly by those eligible for NDIS’ pay people directly at a livable rate. Do away with NDIS contractors who manage and control the disabled and profit from them.
- Examine how to permit e.g. nonprofit and for-profit operators to provide age care and disability services ethically and affordably for those whose pensions are at a sufficiently high level to permit private enterprise to operate at a profit and meet mandatory quality standards.
- Examine the Superannuation system – adjust it to reflect everyone’s access to a Fair Go with a livable pension. Can it be better offered as an option and open a choice between satisfying current needs rather than ‘punting’ on how much a Fund will offer tears away.
- Examine how Taxes are to be used – low or nil taxes as we have them now. How best to tax when inflation is likely
- Consumption taxes, Tax the users of Natural Resources who diminish them? Tax premises used to sell junk food or have poker machines and casinos etc?
- Look at how best to transition to a clean economy and preserve jobs and communities whilst phasing-out fossil fuel use. Use existing mines and resources – skilled people transport and powerlines to transition and satisfy the need to have diesel fuel for agriculture, transport, defence (nearly all of which is imported).
Did Charles Dickens inspire the neoblieral delivery of social security services via Centrelink?
‘Mr Limbkins, I beg your pardon, sir! Oliver Twist has asked for more!’ ‘For MORE!’ said Mr Limbkins. ‘Compose yourself, Bumble, and answer me distinctly. Do I understand that he asked for more, after he had eaten the supper allotted by the dietary?’ ‘He did, sir,’ replied Bumble.
‘That boy will be hung,’ said the gentleman in the white waistcoat. ‘I know that boy will be hung.’…. Oliver was ordered into instant confinement; and a bill was next morning pasted on the outside of the gate, offering a reward of five pounds to anybody who would take Oliver Twist off the hands of the parish. In other words, five pounds and Oliver Twist were offered to any man or woman who wanted an apprentice to any trade, business, or calling. https://www.charlesdickenspage.com/twist-more.html
- Labor should quickly begin an ongoing review of its mind-set about a modern economy, aimed at ditching ideas hanging over from the Gold Standard and the Bretton Woods era. Monetary policy and Fiscal policy are now the tools by which a modern economy adjusts its spending levels and tax rates to monitor and influence a nation’s economy.
- Labor should widely seek on-going informed input from Economists, Academics, and other relevantly trained and competent persons as well as the broader community. Those with a clear, balanced and informed view of Modern Monetary Theory must be included. (For example, Bill Mitchell a professor at University of Newcastle – also holds the position of Docent Professor in Global Political Economy, Faculty of Social Sciences,University of Helsinki. He has advised Governments in Europe,J apan and elsewhere- recently February 2020 – Presentation to the French Treasury and Presentation to French Senate Commission,)
- Evidenced–based recommendations from the Review should be adopted and incorporated into Labor Policy.