Rudd to slash spending
If todays rhetoric from Kevin Rudd is to be believed then an ALP razor gang is about to start slashing away at federal government spending. The argument given for the spending cuts is that it will take the pressure off inflation. Given that inflation is controlled by the central bank the only realistic interpretation is that they intend slashing spending to keep downward pressure on interest rates. Maybe this rationalisation for spending cuts is more palatable in some quarters than the argument that slashing spending will allow lower tax rates but at the end of the day the rationalisations matter less than the actual actions. The government also reaffirmed that it is commited to the tax cuts promised pre-election so hopefully the government will deliver. Time will tell.
p.s. I imagine that some people such as self funded retires quite like high interest rates.
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Lets see if Rudd can be a bigger champion of free markets than Howard. He may earn my support after all. He didn’t manage to set Kyoto targets, and other than using our military to spy on Japanese whaling, hes doing alright so far.
The front page story in todays SMH quotes Rudd as saying “Providing attractive incentives to save can help take the pressure off inflation, help people save for their future and help lift national savings”. Isn’t there just a slight chance that higher interest rates might be just such an incentive? Maybe he should focus a bit more energy on dealing with the supply side of the inflation equation and let demand take care of itself.
If we do end up with a healthy budget surplus then of course the current prospect of a slow down in the US economy would make further tax cuts quite prudent. If the ALP must engage in demand side rhetoric then lets hope they choose to showcase this argument when the time comes.
I’m glad that Rudd realises what a tax-eating commie Howard was and is willing to be a more moderate tax-eater.
Hopefully it gives Nelson and Costello even more room to go economically right. Rudd can come up with the surpluses and the Libs can offer them back in tax cuts.
Oh and a question for you economist types:
Why is it that politicians seem to think surpluses are better for the economy than tax cuts?
Why is it that you guys disagree?
Tax cuts actually return money to the people.
Yes. But how does that benefit the economy and put downward pressure on inflation and interest rates more than a surplus?
Doesn’t spending (which people will do if their money is returned to them) increase interest rates and inflation?
Dear Shem,
I have three teenage daughters, so I am in the eye of a spending storm here and probably an hypocrite, but……
My understanding of the tut tutting over tax cuts versus federal budget surpluses is that,
Despite it being OUR money not being taken AWAY from us by tax cuts lowering what we pay, we fearless consumers are not given credit by the Great and Godly to do something like cut our borrowings or save/invest the extra net income resulting from lower taxes.
Instead it is assumed the ‘Collective We’ will p**s it up against the wall on frivolous consumption which further stresses the supply choke points in the economy and impacts the balance of trade - hence feeding inflation.
So we have the niggling dochotomy that it is assumed I can’t be trusted to retain more of my income because I will buckle under the consumerist pressure at home and blow it.
Or even if I am a responsible saver/investor ( watching the ASX meltdown today and wondering was I so responsible ? ) IF my neighbour was an irresponsible spendthrift - it is assumed by the Great and Godly that because he/she can’t be trusted with more of their own money, then neither should I.
Which is ever so slightly demeaning.
And the further assumption is that the Enlightened Souls in government will take tax dollars surplus to requirements and do good things. Right. Like the NSW State government which has added masses of bureaucrats to the payroll since the GST rivers of gold started, but try and get yourself a critical care bed at Royal North Shore Hospital ? Uh huh.
Just a tad more demeaning.
Now into this give or take debate, we certainly should consider how unfunded government liabilities being handballed off to future unborn taxpayers should be met AND how we pay for necessary infrastructure that needs to be maintained, replaced and expanded ( growing population ). Definitely some worthwhile debates on these points of taxation, user pays and what assets actually should be on the government balance sheets.
But still just a wee bit niggled that I can’t be trusted with too much of my own money for fear I will irresponsibly spend it and damage the well-being of….everyone else.
Seems my trio of teenage offspring and my credit card are an instrument of mass national destruction. I await the imminent arrival of a Swat Team to render my loan account harmless.
Rgds
Father of Three
The expectation that whatever money we get hold of will be used to further extend ourselves is why central banks (at least ones with a view to reducing inflation) don’t like it.
Although it is central banking that creates this envrionment. ‘Elasticity’ of the money supply is no excuse for debasement and counterfeiting.
Rudd might ’slash’ spending now, but it should creep up to and beyond the Howard level by the time the next election is here.
Of course, the whole market seems to be crashing (sorry, I meant ‘correcting itself’), so the economy might be about to implode. I guess that means that Norm Voter will want the govmint to fix things- and that will mean more laws and regulations. If you supply red tape, you’re in business!
Shem,
Inflation occurs when:-
a) the demand for money declines
b) the supply of money increases
You can read (a) as being equivalent to a decline in the supply of goods or the rate of trade. It can also occur when money substitutes increase.
If tax cuts are given without any cut in government spending (ie they increase government debt or else decrease government saving) then this is notionally inflationary because it represents more money chasing the same goods. In practice however the central bank will increase the price of debt (ie higher interest rates) to steralise any such effect (ie they constrain the growth in base money that would have occured if there had been no increase in interest rates). In essence the increase in government debt will crowd out private sector debt. While we have more to spend via tax cuts we have less to borrow and the government assumes this means of spending capacity from us.
However tax cuts also effect the supply of goods in a market via the incentive effect and via improved terms of trade between households. Why cook and clean for yourself, do home renovations, your own book keeping or any number of other activities if improved terms of trade mean you can now outsource these to others? As such tax cuts will increase the rate of trade and in the process they will improve total productivity. More goods chasing the same money will be deflationary.
Longer term the nature of both private and public spending will also vary the supply potential of the economy. Increase private spending on fast food or public spending on statues will do little to improve the future speed of the economy whilst increase private spending on upskilling or public spending on better roads will do a lot more to increase future output. As such a shift in emphasis from consumption to investment will influence future inflation pressures.
The other factor is the willingness of foreigners to provide credit at low interest. Typically a stronger aussie economy will mean reduced risk to lenders and a greater willingness by foreigners to lend at low interest. Currency movements may also offer them a relative capital gain opportunity also.
At the end of the day a lot of factors come into play. And for any mix of tax cuts and spending options there is generally some reasonable grounds for differing preferences and different judgements.
Personally I would prefer low inflation and low taxes and interest rates free to wonder where they may. The main social concern about higher interest rates is that it makes it harder to pay off a home. The flip side is that it makes homes cheaper.
Politicians care about more than just the economics. They care about the presentation because it effects their employment and they care about differing social and ideological agendas (which is why they entered politics).
Regards,
Terje.
So, tax cuts reduce unemployment but increase interest rates and have roughly the same outcome on inflation (in a more round about way)?
And government surpluses target interest rates and inflation more directly, though don’t increase productivity and lower unemployment as much?
In a nutshell?
I guess the other distinction is tax cuts for the current generation vs saving for future generations (to pay off social debts the current generation may incur).
Tax cuts do seem preferable- but in the long run a cut in government spending is nothing to look down on. Hope Rudd sticks to his guns and under-spends Howard (not much of a feat to be honest, but it’s the right direction).
Tax cuts may reduce unemployment if they lift the market rate for labour in such a way so as to surpass some of the price regulation that causes unemployment in the first instance. In addition it may increase employment by motivating people back into the market. If you’re serious about takling unemployment however you need to remove the regulation and price floors not fiddle with fiscal policy.
In so far as surpluses are enforced saving they certainly will have downward pressure on the price of credit. But it is not a given that a surplus is better than tax cuts if you want lower rates of interest because foreigners do matter. The USA has lower interest rates than us but masses of government debt.
In terms of generational equity I would agree that this generation should save for it’s own retirement. However when it comes to the construction of public infrastructure such as roads I think it is better to build them with debt rather than have this generation incur the full capital cost. After all the benefit flows to future generations also. I am not adversely inclined towards public debt if it is for the right reasons.
Also if you treat the tax base as the governments largest asset (it provides a recurring income to government after all) then tax cuts that expand the tax base over time may be a worth while investment that could be justifiable paid for with debt in some circumstances (ie if credit is cheap and the expansionary effect high). In the UK in the 1970s when taxes on investment income approached 90% and the economy was stagnant I would have seen little concern in assuming debt to pay for tax cuts. So long as the extra revenue over time paid for the interest on the debt it would have been worth it merely for the private sector welfare dividend.
Regards,
Terje.
Terje
You seem non-plussed by the pledge to reduce spending. Surely any politician brave enough to shrink the State in any way should be applauded.
Shem - politicians only care about rising interest rates because more voters are landlords than savers. And those voters that do want higher interest rates (pensioners) are not swing voters anyway.
They’re setting up a committee to determine how to limit spending. He sure seems to be doing a lot of committee setting up. Seems to be taking the Tony Blair/Gordon Brown approach to administration. Not a good sign for mine.
Spending on a committee to cut spending?
Cutting off one’s nose to spite one’s face?
Yes, Prime Minister
The government shouldn’t be trying to control interest rates at all. Their fiscal policy should be aimed at keeping the budget in balance over the cycle, in which case their impact on monetary policy is neutral.
I would prefer that a government set up group to discuss the terms of refernce of a steering committee that will oversea the creation of a forum for discussion of the scope of a review to investigate why the original gropu was set up… rather than actually start a program.
and other than using our military to spy on Japanese whaling, hes doing alright so far
Keep an eye on Chris Bowen, Assistant Treasurer and Minister for Competition Policy and Consumer Affairs. He’s the dickhead who accused the LDP in parliament of signing up people without their knowledge, entirely based on the say-so of one elderly constituent.
Bowen has made his agenda clear on his website:
· the appointment of a full-time national petrol commissioner
· giving the ACCC the power to monitor supermarket prices
· helping to make Australia the funds management hub of the Asia-Pacific
· introducing jail terms for serious cartel behaviour
· further trade practices reform.
He’s already blamed the oil companies for fuel prices, announced an ACCC inquiry into supermarket prices and declared his intention to amend the TPA.
Unless the more sensible members of Cabinet can control him, he may be a real loose cannon.
Pommy,
I think the proposed cutting of government spending by Rudd is a good thing. It is merely the packaging for the intitative that I’m picking away at. It will take time to sort the rhetoric from the reality but there is much to find encouraging in regards to this new government.
Regards,
Terje.
John,
When you say:-
“The government shouldn’t be trying to control interest rates at all.”
am I right in presuming that in this context you’re not including the central bank in your definition of government?
Regards,
Terje.
I am welcoming of a reduction of spending by reducing governement to bare bones and then bringing about social change by eliminating the nanny state. I demand a lowering of the amount of money that the government extracts from me, through taxation, then making me a dependent on a devalued hand out. Keep your hand outs please and give me my money and freedom to spend and live as I please! For thoose Libertarian economists who feel this attitude is damaging PLEASE feel free to pay more of your own tax dollars if you feel sacrificing your families income for the benifit of economic theory is worthy.
My speculation - isn’t inflation caused by a devalue of the dollar? If the AUST FED RESERVE used hard currency, which would stop legalised conterfeiting wouldn’t this also stop or slow inflation, in theory?
Inflation is due to monetary policy. Hard money would cure most inflation but other monetary measures would also. Currently in Australian inflation is around 3%. There were times during the gold standard when inflation hit 3%.
p.s. I do ultimately support a return to the gold standard.
The real level of taxation is equal to the level of spending, plus and tax surpluses.
Balance the budget over the cycle, set the RBA long run inflation target to zero.
Actually privatising money is the best solution for this.
Chris Bowen?
You’ve got to be kidding us mate. Petrol is expensive because at least one third of the price is tax. Groceries are expensive because of tariffs. Cartels can’t last long unless they are protected from competition.
Will the LDP support a return to the gold standard as policy? Or at least free competition with paper money?
I honestly hope it is in our sights.
The old policy used to be tighter monetary austerity moving to free banking policy.
So in summary, not a Governemnt move to gold, but a move to competitive issue between gold, paper and whatever.
The LDP as a party is more concerned with reform that we could sell to the public and to the parliament. A lot of members of the party are ideologically sympathetic to the gold standard and it is something to consider pushing as policy down the track, but now it’s more important to get representation so we can have SOME libertarian representation in Australia.
I’m of the opinion that a watered down libertarian party in parliament is better than a hardcore libertarian party out of parliament.
Currency reform mightn’t win us votes, but it can win us members.
Repealing anti-competitive banking laws will not be an issue anyone will oppose. But it will be supported. We should support it but boost the merits of low tax, low regulation, low tariff economic policy and a “bugger off, leave me alone” social policy.
A good tax policy would be to have no other taxes than a flat 20% GST split equally between the tiers of Government, and to reduce the tax gradually as growth permits and as benefactors pay into “tax me more” funds and balanced budgets over the cycle. A 10% consumption tax and no other taxes ten years after the reform would restrain Government to a very large extent.
Yeah, I wasn’t saying it’d be an unpopular move, more that even if we got someone elected with that as a platform the opportunity to actually implement it would likely never present itself unless we won government.
That’s the unfortunate thing about minor parties- they seem to be able to influence the government on social issues, or implementing pork programs, but unless we hold the balance of power it’s unlikely we’ll get much input on economics.
I’m all for a gold standard. However politically it is a very hard sell. I suspect the times they are a changing with the advent of the Internet and advocates like Ron Paul getting the message out but many still regard gold as relic of history and it’s advocates as faith based kooks. Annoying but true.
Many computer fantasy games have popularised the idea of gold as money so the younger generation is probably more easily sympathetic. And the private online gold backed currency called e-gold now has nearly 5 million users and that user base is doubling every two years. I’m more optimistic about a return to gold (but also more patient) than I was ten years ago. I do think this era of floating currencies has entered a phase of slow decline.
Australia is well positioned to return to a gold standard. It’s currency is generally aligned with commodity trends anyway. And today the Australian dollar is one of the top tier currencies in terms of international currency trades. A gold standard would quickly transform us into a major financial hub.
That Chris Bowen sounds like a real tool.
Shem,
Although I understand where you are coming from, my only concern with a “down the track” consideration of free concepts/institutions in a largely libertarian party is that we begin to break down in what we stand for. I believe libertarianism to be firm in “black & white” policies that are pretty much clear cut in favour of “life, liberty and the pursuit of happiness”.
If one policy of freedom takes a back seat because it isn’t considered a top priority - or marketable - what would we have? Everything we stand for is “radical” in the eyes of the public, and commonly rejected through simple ignorance.
I’m definitely not denying that it takes time to effect change, but I feel that we should hold policies indicating a direction or ultimate goal.
Rob, it’s my belief that stopping the growth of government is libertarian compared to the status quo.
Reversing the growth of government, lowering taxes. Even by small amounts are saleable and libertarian.
Saleable political positions are different to popular political positions.
Saleable just means we need to find a demographic that empathises with libertarianism. It can be 5-10% of the population- but our issues need to be relevant to them.
Many computer fantasy games have popularised the idea of gold as money so the younger generation is probably more easily sympathetic.
Terje- I’m assuming you were joking?
Stopping the growth of government is definitely libertarian ideal, however it is still more a belief in a definable limit on government.
A question for the etatist is, where does government end, and where does choice begin? Libertarianism sets out this limit in property rights.
Rob - i think i know where you’re coming from, but it is only worth putting in all the effort required to run a political party if you have policies that resonate with at least some voters. Whether or not to rejoin the gold standard is even an esoteric conversation amongst economists!
Best left for these pages not a party. A political party should focus on simple messages such as less tax, less govt interference, more personal responsibility and more freedom.
It is interesting to hear the Rudd team come under attack for not dumping their promised tax cuts. To hear the Rudd team defend tax cuts is such a change from the days of Beazley.