Why a Small Deficit is Just The Tip of a Big Deficit Iceberg
You already know what the big news of today is going to be so we’ll skip that and comment on it tomorrow.
Of course the other big news is rumoured to be that two million households will get ceiling insulation funded by the government. It is almost too crazy to think about. We don’t know for a fact whether it’s true, but that seems to be the gossip. Your editor’s brain just does not compute why the federal government is diversifying into the household insulation business.
Maybe there is good money in it. We don’t know. But what we do know is that whether you like it or not, you will be buying someone, somewhere, some ceiling insulation. Perhaps the government could pass on your name to those that take the government up on the offer so they can send you a ‘thank you’ card.
But we won’t write about that either. Wayne Swan is due to release details of the latest ’stimulus package’ at 12.30 (AEDT) today. Nothing we write will be able to compete with the entertainment of seeing housing insulation touted as the saviour of the economy.
Instead we’ll take a bash at the “Budget’s $115bn black hole” and the impending “small” deficit that the government is about to plunge us into.
If you’ve been reading Money Morning or the Daily Reckoning over the last few years you’ll know that your editor has argued against the build-up of government profits - or as they and the mainstream press like to term it, government surpluses.
Our argument has always been that the government should not be a for-profit entity. That if it is drawing in surplus revenue it should stop and give it back.
By the same token the government is now signaling that it is about to go into deficit. And unsurprisingly public funded organizations such as the IMF and World Bank are suggesting that going into deficit is a good move as it will help to power the economy out of recession.
Again unsurprisingly, most economists, business groups and welfare groups are also urging the government move into deficit.
But if you thought the ceiling insulation initiative was madness then you’ll love some of the comments about prior surpluses and the soon to be realized deficit.
Apparently, according to most of the talking heads we’ve seen on television and heard on the radio, it is good that the government had built up a $20 billion-plus surplus because otherwise the economy would be in worse shape and the deficit would be even higher.
And they say it with a straight face. It is like saying to a gambler, “It’s a good job you won all that money last year because now you’ve lost it all. Imagine if you hadn’t won, you would have been even worse off now.”
It gets even better than that. ABC radio interviewed Joshua Gans, professor of economics at the University of Melbourne, he said:
“If there’s a free lunch out there where we can reduce taxes and increase tax revenues, we should definitely take it. But I don’t know how that free lunch has appeared right now.
No we wouldn’t. The idea is that not only do you cut taxes but that you cut spending as well. It’s not rocket science, and you don’t need to be a professor to work that one out. Anyway, Professor Gans continued:
“Ronald Reagan, he tried this. He had this theory, it did not show up. They dropped taxes; all they got was a bigger deficit for a decade. I don’t see any possibility of this occurring here in Australia right here, right now. And even if did, the last thing we would necessarily want to be doing is taking more in total dollar taxes out of the economy and making a bigger government.”
OK, he’s getting the idea, don’t raise taxes and keep the government small. But then unfortunately the Prof goes askew again:
“It’s probably time to bring forward the big ticket infrastructure expenditure items that the Governments might have put off for some years because the time wasn’t right.”
In other words, government spending! But it’s not just Professor Gans who is all over the shop on his economic theory. In the same story the ABC interviewed another boffin, Professor Raja Junankar from the University of Western Sydney.
He is also against giving taxpayers money back to taxpayers. He also thinks that government knows how to spend your money better than you do. This is what he said when asked whether broad-based tax cuts were a good idea:
“I think there’s no evidence to support that kind of view. In fact, after a moment, because the economy is in a recession or getting into a much worse recession over the next few years, next few months, that cutting taxes probably is not going to stimulate any extra activity. The only thing that’s going to stimulate more activity is if you can increase aggregate demand in economy, which means increasing spending on infrastructure, on hospitals, on schools, on roads and those kind of big expenditure patterns that we want to increase.”
Again, we’re not sure that we need to repeat again our view on throwing more money into the black hole of state funded health and education.
But this is surely what will happen. And it is why the mooted small deficit will sooner rather than later turn into a big deficit. Simply because one-off spending on these big white elephant projects will only lead to even bigger recurrent expenditure in future years.
The economists and mainstream press seem to forget that the only way to deliver a stimulus to the economy is to give more money back to taxpayers. This will lead them to either spend it, or more likely they will save it.
If they save it in a bank then it adds to the banks’ capital base which then allows them to lend money as consumer or business lending.
Paying for ceiling insulation and encouraging every to spend, spend, spend may have a short term positive impact for some businesses, but in the long run the increase in government debt will only have the effect of drawing money away from the private sector towards the public sector as the government refinances its own debt.
The bank’s have already loaned out as much as they can, rather than trying to patch things up with government guarantees and a ‘Rudd Bank’ the government should just cut taxes and let people save. This will naturally recapitalize the banks and it won’t cost the taxpayer a cent.
Instead, the deficit will continue to grow and grow, and because it has been in profit until recently, the Australian government has the ability to borrow much more relative to the size of the economy than the US and the UK.
Other Stuff on the Markets
Everything seemed to fall last night, the Dow Jones, Crude Oil, Gold and the Aussie Dollar. The Aussie may come under further pressure if the RBA cuts by more than 100 basis points today.
The market continues to build in a 100 basis point cut. In fact, according to the implied yields there are bets that the RBA could cut even further.
Business lobby groups are keeping up the pressure on government to spend your money. The Australian Chamber of Commerce and Industry wants the government to spend up to $25 billion. No doubt to prop up the businesses of its members.
Gold Coast property tycoon Jim Raptis has seen his company collapse with debts of around $1 billion. Is this the sort of over-leveraged property investment that the new property bail out would have financed?
