By David Prattent

MarketWatch is watching economic developments with not a little bemusement, tinged with a modest amount of despair.  It seems we have plenty of information about the problems, but no-one to take charge of the solutions.  Our politicians just blame each other, which is, after all, their job.  But MarketWatch can’t help feeling the economy is far too important to leave to politicians however clever they think they are.

Last month we talked about monetary policy and the things that the Reserve Bank can and can’t do, and the pitfalls of doing anything, or nothing.

If you can bear with me for one more article, we are going to discuss fiscal policy, and what governments can and shouldn’t do.

Fiscal policy is the term used to describe a government’s contribution to the economy.  It manifests itself in two key ways; tax policy and government expenditure.

Tax policy is not quite so boring as it sounds.  Changing the rate of tax for individuals and companies can have a dramatic effect on spending patterns and competition.  So why don’t we supercharge the economy and lower taxes and get people to spend more?  Well, this outcome is just not guaranteed.  Remember a little while ago the government sent out a tax refund to a large number of people?  The postal service where MarketWatch lives must be a bit wonky because he is still waiting for his to arrive.

The public were exhorted to spend it and, guess what, they didn’t.  Why?  Well, there are several reasons but the favourite is that consumer confidence is lower than normal because people are worried about the economy.  When you are worried, you tend to save money or pay down debt.  In economics, reducing debt is the same as saving money.

Similarly, if a company pays less tax is it more likely to hire additional people?  Confidence in business conditions took a nosedive is at the end of 2018 and has trended downwards since then.  If you are a business and are not confident for the future, you tend to do exactly what the consumer does and use the funds to relieve internal pressures.

But hang on, I can hear you calling, the Americans reduced taxes and their economy is growing.  And employment creation increased in November.  Why would that not apply here?  And it’s a good question, because their unemployment is lower, the consumer is more confident, and their economic growth is higher, although still below average.

US national debt, that is government debt is about US$23 trillion, which is quite a lot of money.  Five years ago, it was about $18 trillion.  When you cut taxes, unless the government stops doing something, debt rises to fill the revenue gap.  The Americans seem to have concluded that debt no longer matters.  And, probably, they are right in their case.  They are clearly ignoring the fact that debt actually needs to be repaid, unless you are the Venezuelan government.  As an aside, the US debt annual interest bill alone is about $479 billion.  Imagine that, over a billion a day on your credit card interest.

By contrast, Australian national debt is only $542 billion and was $369 billion five years ago.  To put this into perspective, this represents about 18% of our gross domestic product (GDP) compared to about 77% for the Americans.  On that basis we could borrow more but need to remember we are a much, much smaller economy.  Doubling our debt to come up to a comparable level is a bit scary and diverts spending on the community to interest payments.

This makes tax cuts riskier.  Providing this government maintains itself in office, personal tax cuts have been built in to future budget assumptions, although the “China risk” of their slowing economy might put pressure on that scenario.

So, if the tax cut route is risky, why not borrow more now that money is cheap and spend it on infrastructure which creates jobs?  This involves the creation of productive infrastructure such as airports, ports, some types of roads and industrial developments.

This is actually easier said than done.  For example, Japan’s rural areas have been paved over and filled in with roads, dams and other big infrastructure projects, the legacy of trillions of dollars spent to lift the economy from a severe downturn caused by the bursting of a real estate bubble in the late 1980s.  During those nearly two decades, Japan accumulated the largest public debt in the developed world — totalling 180 percent of its $5.5 trillion economy — while failing to generate a convincing recovery.

Recently, the Morrison government announced an infrastructure spending programme and, I quote “This will support the economy in two ways – by accelerating construction activity and supporting jobs in the near term, and by reaping longer run productivity gains sooner.”  The expenditure programme is for $3.8 billion over four years.  It is not, however, new expenditure, but rather existing future programmes which have been pulled forward.  There is no indication regarding the gap it left in the forward plan.

Western Australia gets an $883 million share of that pie over the next four years.  But while the projects will help construction companies and their suppliers to maintain current employment levels, lasting productivity gains are much harder to identify from the list.  But that won’t matter because we will have moved on four years, had another election and the politicians won’t need to worry about the details of where productivity comes from.

Although this a fairly cynical, but realistic approach, it points to the difficulty of using government expenditure programmes to stimulate an economy.

So there we have it.  The RBA wants the government to spend more and the government would like the RBA to do more.  On balance, the ball is in the government’s court as the RBA need to keep some ammunition in reserve in case of a future crisis.

And none of this addresses some of our key economic and policy issues such as bracket creep, Australia’s lack of competitiveness caused by high energy prices, labour costs, and rents.

But, mercifully for MarketWatch, its nearly Christmas so his mind is turning already to a seasonal drop.  For Christmas Day, consider a bottle or two of sparkling shiraz.  In Europe, this type of wine has struggled to shake off its reputation for being sweet, cheap and a bit naff.  But the local stuff is highly underrated and, served chilled, is a delightful change on the big day.  As a traditionalist, MarketWatch always plumps for the Seppelts.  Its not the most expensive but the family just like it more than the others.

So with that thought, have a happy, safe and peaceful Christmas and New Year, and we will leave thought of the weightier issues until 2020.

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