Stand back and take a look at the Australian Government’s outstanding debt position over 17 years and ask yourself whether the politicians words of “fiscally conservative”, “balanced budget”, “ensure all new expenditure is funded”, and variations of “surplus, surplus, surplus” actually mean anything.
It looks like a straight line, and sure, there have been times where the trajectory has flattened for a short period of time. Forgetting the Covid debt blowout, the average annual increment has been about $50 billion. Covid has kicked up the annual increase to $135 Billion (to May 2020), but in the circumstances, the Government has done a reasonable job to keep the economy afloat. The Government has also used $67 billion of the borrowings to make asset purchases to assist in market liquidity.
The economic forecasters are concerned that the Government will not be able to wind back it’s largesse when the current expenditure programs are due to be wound back after September this year.
Taxation in Australia is in desperate need of reform but good luck to any political party bringing a reform agenda into an election. And given the Covid situation and the long-term effects it will have on the economy, large budget deficits are the likely outcome for years to come.
Over recent times, Governments around the world have discovered the magic of Modern Monetary Theory (MMT). This is where Governments who are issuing their own fiat currency, by definition, cannot run out of it. Just think of it, if I could issue “Mike Dollars” and somebody wanted me to repay $1m of debt, all I need is a pen and a piece of paper to make good on the debt.
Simplistically, MMT works in a country if there is plenty of capacity in the economy. If there are too many dollars chasing too few goods, then you get hyperinflation. America, Europe and Australia are a long way from that prospect.
My view on MMT, having studied it for a long time, is that the natural consequence of issuing debt is that there must be investors who own the debt. And in modern developed economies that have favoured the wealthy for decades, the money has flowed straight to the top, causing the massive wealth gap that now characterizes most societies.
Which, of course, brings us back to tax reform. Governments need to tackle the issue of taxation policies that favour the rich, placing the burden on other people in our society, some of whom are struggling to survive.
So, I see skyrocketing debt in the US and Australia as a lack of taxation of the wealthiest, those who have sufficient sway over Government to be able to affect policy. Does it really matter whether Jeff Bezos has $USD 160 billion or $100 billion? It will not affect his life. Even Warren Buffet said that Trump’s tax changes netted Berkshire Hathaway $29 Billion. He didn’t need it.
Governments better start listening. A country moving into recession, with high unemployment rates, increasing debt stress and greater societal stress will get political parties booted out of office if they don’t make changes.
Michael Cornips is the Managing Director and Founder of Emerald Financial.
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