Other economicsics
A thinking treasurer’s guide to economic policy
In this pre-budget period journalists, desperate for a story, try to squeeze budgetary clues out of ministers. Will there be more money for GPs? Will the Stage 3 tax cuts go ahead? Will the Jobseeker rate be increased?
Treasurer Chalmers, in a substantial essay in The Monthly, has brought the economic debate to a higher level. His essay capitalism after the crises is about how the very principles of economic management must be re-designed in a world where three successive crises – the global financial crisis, the pandemic, and now the disruptions of war and supply problems manifest by high inflation – have left all societies vulnerable. He makes the valid point that nine years of indolent government has worsened the situation, but he sees the problem less in terms of the previous government’s corruption or incompetence, than in its failure to understand what was happening in the world. Neoliberalism as championed by the right for many years was dying, but our government, and others around the world, were not adapting their policies to changed circumstances. They hung on to the old prescriptions.
This is not to suggest that Chalmers is predicting the end of the capitalist order. Far from it. But the capitalism Chalmers envisages is one where markets must work to advance well-being. So too must governments. That’s hardly a radical view, but it has to be asserted, because governments have lost sight of that objective. Hence the importance attached to the wellbeing budget.
He spells out the way such a philosophy should guide economic policy in three related ways. First is a transformation of our industrial structure to deal with the needs and opportunities associated with climate change. Second is the requirement to make the economy more resilient and adaptable in an environment that will go on throwing up challenges. And third is a growth model “that puts equality and equal opportunity at the centre”.
It’s hard to imagine any other treasurer in our recent history having written such an essay. It’s about the values and principles of public policy in a democracy. It places economic management in its place as a servant of society, and as part of a complex system of relationships where there are no simple formulas. In his criticism of the old order he writes:
By failing to put values at the forefront of how our economies work, we also leave behind reams of wasted talent, a degraded environment and social dislocation – all of which threaten to diminish the productive capacity of our economies and ability to create “value” in the first place.
It doesn’t have to be this way, he adds.
IMF – outlook for the world and for Australia
The world economy
According to the IMF’s latest assessment of the world economy the outlook is a little gloomier than its last forecast made in October. The global economy will slow in 2023, but there could be a turning point, “with growth bottoming out and inflation declining.”
Its forecast for world growth in 2023 is 2.9 percent, up from 2.7 percent in its October forecast. This is mainly because of a strong rebound in China. In “advanced economies” its forecasts are little changed, apart from the UK where the forecast is now for a 0.6 percent contraction, compared with 0.3 percent growth in the October forecast.
Its main policy prescription for countries is to reduce inflation (predictable). Containing Covid-19 remains a priority, as does strengthening multilateral cooperation, including international cooperation on carbon pricing or equivalent policies.
Australia
The IMF has also released its economic assessment of Australia. It’s reasonably positive about Australia’s fortunes, and expects our economy to experience a “soft landing” in 2023.
It is highly approving of our “new climate mitigation targets” – which “should be supported with strong policy actions”. It states that “a broad-based carbon price, coupled with measures to mitigate transition risks for impacted regions and industries, remains the most cost-effective way to achieve abatement goals”.
It carries the usual IMF emphasis on the need for fiscal consolidation and control of inflation. It also sees high house prices as a problem, but it believes that the inevitable correction should not pose a threat to financial stability. It calls for policies to increase housing supply to make housing more affordable.
Some press reports have suggested that it supports the State 3 tax cuts, but that’s too simple an interpretation. The IMF, in line with some other international observers, urges Australia to shift its tax mix from income taxes to other taxes, particularly consumption taxes, where our rates are low in comparison with other countries. It sees the Stage 3 tax cuts in that context, while acknowledging that they benefit only those with high incomes.
It is certainly not calling for Australia to reduce its taxes. In fact it acknowledges that we need tax reforms “to meet higher structural spending needs” and to fund government programs, but we do need to make our tax system “more efficient and equitable”. In this regard it recommends that the capital gains tax exemption on our main residence (“the family home”) be restricted. It also recommends that states levy property taxes in lieu of housing transaction taxes (stamp duties)
Monitoring financial stress – Google it mate!
The government’s economic institutions, including the Reserve Bank and the Treasury, need to keep a close eye on the extent to which households and businesses are experiencing financial stress. How many households are close to defaulting on debt; how many businesses are ready to declare bankruptcy? It is difficult, however, for government agencies to get timely data on such phenomena.
Finn Lattimore and Max Zang of the Economic Research Department of the Reserve Bank have turned to “non-traditional” data sources to obtain such indicators. Those sources include news, social media, and results of word searches in Google Trends. If there has been a jump in the number of searches for “bills” or “bills, hardship” (two of the many searches they monitored) households may be starting to experience cash-flow problems.
Their research is published in the Reserve Bank Bulletin: New measures of financial stress from non-traditional data. To check the reliability of their method they ran their model past historical data from traditional sources, and they match reasonably well.
Will the Board be using their data on Tuesday when they set the cash rate?