‘Little knowledge’ budget

The dictum that “a little knowledge is a dangerous thing” rings very true in the run up to the federal budget.  Limited understanding of macroeconomics in particular has been evident from the mantra that the economy needs sizeable fiscal stimulus in the form of increased government spending to boost aggregate demand.

High school and first year university students of economics everywhere learn that hiking government spending counters recessions and lowers unemployment.  But prescribing this as the excuse for a big spending budget is seriously flawed in current circumstances.

This recession is not remotely related to any previous recession Australia has experienced.  Caused by government-imposed restrictions on private firms, it has first and foremost shrunk the aggregate supply, or production side, of the economy. 

What economics undergraduate students learn in their second or third year is that economies like Australia are highly integrated with international goods, services and capital markets. 

Students then learn that any attempt to ‘stimulate’ aggregate demand with extra government spending only acts to induce capital inflow, appreciate the real exchange rate and harm internationally exposed sectors like hard-hit tourism.  The net result is likely to be zero net impact on the economy and jobs.

A little knowledge of macroeconomics also means not appreciating the future risks of running up public debt.  Public debt did not figure at all in Keynes’ simple theory.  Nor did foreign borrowing.

Yet, in reality, it is mostly foreign entities that buy the bonds being issued copiously by the federal and state governments.  The annual $15-odd billion, and rising interest payments on that debt. is ‘dead money’ that subtracts from national income. 

Meanwhile, those bonds purchased by domestic entities soak up funds that could be used more productively by firms.  While extremely low interest rates suggest no clear and present danger to the economy, the speed at which public debt has escalated suggests a clear and future risk. 

This is an edited extract of an opinion piece published in Spectator’s Flat White section as We need a strict supply side focus to fix this government induced recession.