“We’ve taken the biggest surge in national income in years and squandered it. The punters are spending every cent they can and Canberra is encouraging that by handing back its share of the commodity price loot as tax cuts.”
Who would say such a thing? Sounds like the rantings of some bleeding heart welfarist think tank, rather than Australia’s leading economics consultancy, as Access Economics likes to describe itself.
Yes, Keynesian wannabes Access Economics released a report fretting about interest rate hikes, and it feels the answer is to remove the financial options of individuals and ensure that the government collects and hoards ever more of the people’s income. I suppose one should look at it this way; some day soon you might benefit if you find yourself in a geographic or demographic sweet spot that the government needs to court come election time.
Talking about rum plans, this proposal from Deloitte floats an admirable (though not particularly original) idea – swapping tax deductions on work expenses for across-the-board tax cuts. Liberals will start to choke when they see Deloitte’s adjustment of the progressive income tax rates:
The poorest tax payers would see their rate cut from 15 per cent to 4 per cent, with the 42 per cent tax rate paid by people earning $75,001-$125,000 falling to 33 per cent. The top 47 per cent rate paid by those earning more than $125,000 could be cut to 44 per cent.
Deloitte would surely have access to the masses of theoretical and empirical evidence showing the superior economic benefits of shrinking the gap between top marginal rates of income tax and the lower rates, not to mention the moral argument. Why this EC (and I do not mean European Community, though maybe I do…) drivel, then? Why do Deloitte believe they need to field a taxation proposal that is going to win elections?
Thankfully, the political party that prides itself on its fiscal responsibility and economic liberalism holds government in Australia. Yet we have a curmudgeonly treasurer (chancellor of the exchequer) who steadfastly refuses to budge over our absurdly high top marginal tax rate of 47%. He is more than happy to ladle out benefits to politically useful groups, however. Oddly named, the Liberal Party of Australia, when one considers it is run by big government conservatives.
Couple these few good men with the leading economics consultancies, who seem to be trying to outdo each other in the social crusading stakes.
Have these people never heard of the Chicago school? I despair.
James, well said. Keynes was an intellectual huckster of the first rank, giving cover to the looting urges of politicians. I strongly recommend Henry Hazlitt’s economic writings as a demolition job on Keynes and his ilk.
I doubt these folk have heard of the Chicago school. They probably think it refers to a blues group.
Costello (the treasurer/chancellor of the exchequer) is only holding back on tax cuts until the PM retires and he takes over. Then it will be a tax cut bonanza for all, thus ensuring his reelction.
Luckily the situation here in the UK isn’t the same. Once Brown finally takes over from Blair (if indeed he ever does) there will be no scope for similar tax cuts as he has already blown the economics of the country. He won’t be able to buy a bus ticket let alone buy his way to reelection.
Currently, I see no evidence to support that hypothesis and plenty to the contrary.
Besides, who said Costello is going to be the next PM? Others are shaping up quite well at the moment…
Access’ argument is, as usual, incredibly wrong. The present government is presently running a $8 billion (AUD) surplus after a massive reduction in debt. They are reducing taxation and distributing some of this surplus, as small government conservatives do.
Here are some other facts Access fails to mention:
Australia is now a high growth, low inflation, low interest rate economy in which a small, efficient government sector, continuous structural reforms and more flexible businesses and labour markets drive high productivity performance and falling unemployment.
-Over 1993-2003, Australian economic growth outstripped US growth by an average of about 0.7 percent per annum.
-Over 1993-2003, inflation has averaged 2.2 percent in Australia and 2.9 percent in the US
-Australia is now also, like the US, a low interest rate economy
-Australian labour productivity growth has jumped markedly, and is now higher than the US.
-Both US and Australian labour markets are performing at record rates of employment growth.
-And as a final suggestion of major changes in attitudes and in the way Australians view their economic opportunities, there are now more Australian share-owners than trade unionists.
(tip: http://www.onlineopinion.com.au/view.asp?article=1385)
And they’re one of the longest serving governments in Australian history. Funny what happens when politicians realise that their role is to let the rest of us get on with it. Let the good times roll!
‘as Access Economics likes to describe itself’
That is really the key phrase. Nobody that has ever been exposed for a length of time to their poorly researched, inaccurate, insane drivel would call them Australia’s leading economics consultancy.
So what’s Deloitte’s excuse?
No offence meant to people who work in the financial services industry, but people who operate on the financial markets often make poor economists (they are great at making deals and getting rich – but they are very bad at seeing general principles of economic law, it is not there job).
Even David Ricardo (a wonderful finance market man)was actually (contrary to his reputation) a terrible economist whose work was full of basic errors (and that is not just with the eyes of 2006 – people at the time pointed them out).
As for Australia:
There has been a credit bubble in Australia (as there has been in most Western nations) and things may well turn bad at some point (credit money boom’s created by treating credit as deposits and lending on the basis of these “deposites” tend to end in busts).
However, “lower taxes” will have nothing to do with the bust.
It is like the much attacked “Lawson boom” in Britian – the boom-bust cycle was not caused by tax cuts (although they got the blame), it was caused (as such things always are) by an expansion in the credit money supply (i.e. credit expansion via the central bank, with the private financial institutions treaing credit movements as deposites and lending money on this basis – thus increasing the money supply still further).
Australia should indeed cut the top rate of income tax (and it was only in the 1970’s that Australia got a capital gains tax – that mad tax should certainly go).
As the budget is in surplus (and a cut in the top rate would boost revenue anyway) the old double lie that “tax cuts caused a deficit and the deficit caused the boom-bust credit money cycle” can not even be seriously claimed to apply.
Of course if Australia wished to not have a boom-bust cycle again and just have economic growth based on work and real savings (i.e. people choosing to invest rather than spend on present consumption – not “savings” as in phony bank “deposites”) then it could do so.
But this is not really an option whilst the vast majorty of people think that banks and other financial institutions can lend out vast sums of money without much real saving going on.
One of the basic laws of political economy, that investment should be based on real savings, is simply not accepted either in the financial world or in the political or academic worlds.
A quick question.
A man (“Mr Smith”) deposites one hundred Dollars (in notes or coins) in Bank A.
Another man (“Mr Jones”) sells Mr Smith a product for one hundred Dollars, and accepts (in payment) a cheque (issued by Bank A) and takes the cheque to Bank B.
How much money is there now, not counting any other money apart from the above, in Bank A and Bank B?
The financial and academic world say “two hundred Dollars” and, further, think that both Bank A and Bank B. can lend out a hundred Dollars each.
In fact, from the above transactions, there is only one hundred Dollars. Anything else is a credit-bubble which will help lead to a boom-bust cycle.
their job not “there job” and all my other errors.
Real savings Paul? In Australia, sometime in the next decade superannuation funds ALONE (excluding all other instiitutional and private savings) – that’s real money, real savings – will reach many trillions of dollars. There will be so much enforced savings sloshing around that financial managers will be crawling all over each other trying to figure out where and how the hell to invest it all.
James, don’t know what date you wrote this piece, but perhaps before the bunny in the Libs came up with his bright spark idea to cut the 15% tax on super funds, instead of giving direct tax cuts – the Clayton’s tax cut. (Sure got me salivating with excitment.) Not only penalising every current self funded retiree who has already been ripped of numerous times, but totally regressive (no help to the rich OR the poor), and zero incentive for anyone to be stashing even more into super or any other savings plan – why would a 20 or 30 year old put more money into super when they may never live to spend even a dollar of it? Four five years is a hell of a long time to maintain excitment about what a great little super plan you have.
Access Economics are funny – they don’t want us to spend money. The heart beat capitalism anyone?
You do know that Access Economics was set up by former Federal Treasury staff? That was around 15 years ago I think. It might still be the leading home for Treasury refugees.
Forced saving is a different issue. As a libertarian I am not in favour of it – although I can understand the horror that the Australian powers-that-be have of being caught in the American or European position of having vast future liabilities (in pension claims and so on) and no way to finance them.
Of course the promises (to look after the old, and the sick) should not have been made. But at least the Australian government has tried to look to the future rather than the North American and European attitude of “promise the suckers anything”.
The banking question is complex. There are many different ways of taking (say) one hundred Dollars of notes and coins deposited in Bank A and turning it into many hundreds of Dollars of bank loans (from various banks).
For example, bank A. lends out one hundred Dollars to Mr Jones (but Mr Smith’s one hundred Dollars of notes and coins stay in the vaults), Mr Jones deposites this “one hundred Dollars” (really this credit) in Bank B. which lends out this “deposit” and ………..
Really it comes down to what one calls a deposit.
Especially as even Mr Smith (the start of the chain) will mostly likely be paid by cheque (or some other means) rather than notes and coins – so the chain starts with credit.
And all of the above leaves aside the matter than even notes and coins are just fiat money (fiat money is a different issue to bank credit expansion).
Even when banks entered into contracts to pay in gold (or silver or whatever), when their paper was presented to them they sometimes did not produce the material they had promised – they would lobby the government to “suspend payements” to “save the financial system”.
Even in the 19th century banks did not tend to operate on the basis of 100% reserves (in fact this was very rare).
Things like the famous Peel Act of 1844 did not touch this (the Bank of England and the Scottish Banks may not have been able to issue any more notes without having reserves to back them – but bank deposites are NOT notes, if one can call a credit movement a “deposit” and lend on the basis of it, then one is straight in to boom-bust land).
Whether financial institutions should have been able to have the laws of contract “suspended” when it did not suit them to honour their contracts is a moot point.
It is a moot point as, today, the whole system is just a credit bubble (so the banks are no more guilty than anyone else).
Of course banks should be allowed to be “fractional reserve” if they wish to be. As long as they are not given any help by Central Banks (which should not exist) or any other government backed institution.
In short a credit bubble should be allowed – as long as all the people responsible for the bubble are allowed to go bankrupt when it bursts (as it will – sooner or later).
Also the laws of common law fraud should be applied to financial institutions. One should not be allowed to treat (in the accounts) a credit movement as a deposit. Although here some libertarians would not agree with me “no, people should be allowed to say whatever they like in their accounts”.
If someone says “my bank has just had X number of Dollars deposited” he should be able to physically show these Dollars. Not book or computer records.
Otherwise the reply should be “no you have had the PROMISE of X number of Dollars, you can not lend them out till they are actually in your vault”.
This is on the basis that someone can not lend what he does not have. I have no problem with money lending (at any rate of interest), but people lending out money they have not got is a problem (again this is nothing to do with gold, silver of any other material – it is just as true if money is fiat notes and coins)
Almost needless to say all of the above is a minority view. “You would bring down the whole system by demanding the above”.
Then it is a rotten system, which will eventually bring itself down. One can only hope the bump is not too hard.
Paul – great points, and I understand what you’re saying. I still find it bemusing that I run up my own credit cards, in full awareness that it’s just vapour, there’s no money being exchanged no matter how much I spend, except for the amount that I pay each month, and even then, if I use electronic transfer to make my payment, which most of the time I do, there’s still no real money being exchanged or deposited anywhere within the system. It’s as if we’re all playing “pretend”.
So far the game is working, what are the key factors that would (will?) trigger the bubble splattering? Do you see that happening – when?
“Real” money, in the form of lumps of metal, is unnecessary to the functioning of an economy. Money is simply an abstraction, and frankly it doesn’t matter whether it is backed by bits of metal or state fiat – provided it is relatively stable and can be exchanged for other tokens , that is ALL that matters.
EG