Ideas@TheCentre brings you ammunition for conversations around the table. 3 short articles from CIS researchers emailed every Friday on the issues of the week.
We are in the middle of a very much delayed state and territory budget season.
When fiscal discipline is thrown to the wind, there can be something for everyone — as was the case in this week’s ‘bread and circus’ budget from New South Wales.
Vouchers for every adult resident of the state to spend on meals out and entertainment; another year of free pre-school; free tutoring for school pupils; grants for businesses; and so on down the list of goodies.
Mixed up with all this was the tantalising prospect of a worthwhile tax reform — replacing the property transactions tax (stamp duty) with a property value tax. But that is a project that has a very long way to run.
What the Treasurer did not shout from the rooftops is the fact that all the largesse in the 2020/21 budget is being delivered with money borrowed on behalf of the recipients — the taxpayers of NSW.
The principle of borrowing to build or buy long-lived and productive assets has long been accepted. Borrowing to pay recurrent expenses is another matter. Running a surplus of revenue over operating expenses used to be a line in the sand that state governments dare not cross — or only rarely and to a very limited extent.
This measure of fiscal responsibility has been discarded in the coronavirus pandemic. Indeed, one metric of the laxity in public finances today is the proportion of operating (recurrent) expenses financed by borrowing. Before last year, that had never been more than 3%. This year it is budgeted to be a remarkable 16% ($16 billion).
On another metric — net debt as a proportion of a year’s operating revenue — NSW is heading for the previously unthinkable level of more than 100%.
To be fair, state governments have faced an avalanche of unexpected expenses and revenue losses owing to the pandemic, and in the circumstances it would have been impossible to avoid an operating deficit and increase in debt of some magnitude.
But this could have been carefully managed or it could have been made worse by discretionary expenses that are avoidable, wasteful and in the ‘bread and circuses’ category.
Unfortunately, the NSW government — and other state and territory governments to varying degrees — have opted for the latter.
The Reserve Bank has cut interest rates to zero and is intervening in financial markets to get the economy moving again. Is it doing enough?
The best way to judge this is to compare the Bank’s objectives with its forecasts. By this standard, the announced policy measures have been inadequate.
The RBA’s main objective is to keep inflation between 2 and 3 per cent. Despite the stimulus, inflation is projected to reach only 1.5 per cent in two years’ time.
Monetary policy is also meant to maintain ‘full employment’, which is estimated to mean an unemployment rate of about 5 per cent. However, the RBA’s cuts will not be enough to bring the unemployment rate below 6 per cent.
More aggressive policy would deliver better outcomes – in particular, lower unemployment and higher inflation. It would bring us closer to our objectives.
So the RBA should do more.
What should it do? There are many options. The Bank’s asset purchases should be scaled up and broadened. Research finds that negative interest rates are effective. The Bank should push the exchange rate down. Prudential restrictions on lending (many of which had a flimsy rationale in the first place) should be relaxed. And more. My favourite is Milton Friedman’s suggestion of a ‘helicopter drop’ of money, which essentially means tax cuts financed by selling bonds to the central bank.
The prudent approach is to do a bit of everything. Because we are in unfamiliar territory, there is uncertainty as to which instruments will work the best — or even whether they will work at all. That is an argument for trying them all, not for trying nothing.
Announcing the RBA’s latest measures, Philip Lowe said “If there’s a case to do more then we will do it.” He also said “Even with today’s policy decision, inflation is too low, and the unemployment rate is too high.”
If that is not a case to do more, what is?
This is an edited extract of an opinion piece published in the Canberra Times as RBA needs to do more to boost economy
Calling for a Royal Commission into media diversity, Kevin Rudd and Malcolm Turnbull claim the Murdoch media (The Australian and metro tabloids) are a threat to democracy and stifle diversity of views.
Rudd and Turnbull say Australia’s mainstream media (apart from News Corp) represent fair and balanced journalism. But there is no such thing as objective journalism. Every day and in every decision, editors and reporters make subjective judgments about the stories to investigate and sources to quote.
For those who spend time reading mainstream newspapers such as The Guardian and the New York Times, there is nothing the least bit strange in the proposition that a broad and intense left-liberal bias — or groupthink — all too often shapes the news coverage. It’s something readers have known for a long time and in these polarising times it’s becoming increasingly evident.
The critics say News Corp threatens media diversity. But Australia is not suffering from any lack of media sources: The Guardian, The Saturday Paper, The Monthly, Quarterly Essay, Crikey, The Project, New Matilda, New Daily (all well to the left of the ALP), not to mention the Nine newspapers, the Seven network, SBS and the ABC. The marketplace of ideas has never been so crowded.
We’re told News Corp has excessive influence in the political process. Really? Ask Annastacia Palaszczuk, who’s weathered the Courier-Mail’s constant criticism to win three Queensland elections. Or Dan Andrews, who despite the Herald-Sun’s criticism, remains popular as Victorian premier.
The news website with the largest digital circulation is the ABC, with Murdoch owning just two of the top ten websites. (Nine outlets have three.)
Desire for revenge against their media critics is what’s really driving Rudd and Turnbull, but they alone were the architects of their demise. The point of being PM is to exercise power. Both leaders never seemed to have been in control of events, but always their victim. In office, they lament, they were caught in up in a momentum dictated by Murdoch’s editors. This is their way of offloading blame.