Other economics
What the RBA did on Tuesday
Or, more importantly, what it didn’t do, because it left the cash rate target unchanged.
Its press release still carries warnings about inflation, but it does state that “inflation in Australia has passed its peak and the monthly CPI indicator for May showed a further decline”.
It intends to “continue to pay close attention to both the evolution of labour costs and the price-setting behaviour of firms”, and warns that “some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe”.
The CPI for the June quarter is scheduled for release on July 26, and the Monthly CPI Indicator will come out on the following day, in time for the RBA meeting on Tuesday 1 August. Those figures will unleash a flurry of speculation, but the trend worldwide, and in Australia, is that inflation is falling. The policy question is whether the supposed benefit of forcing inflation to come down more quickly would be offset by the cost of further interest rate rises.
What’s so good about a budget surplus?
Last week the government was bragging because monthly figures released by the Department of Financerevealed that over the 11 months to May the Commonwealth’s underlying fiscal cash balance was $19.0 billion. This compares with a budget estimate of $4.2 billion – barely a surplus. Receipts are up substantially, mainly because of high commodity prices, while payments are down a little because of lower than expected unemployment.
In statements on the ABC Prime Minister Albanese puts the outcome down to “the government’s responsible economic management”, while shadow Minister for Climate Change and Energy Ted O’Brien puts it down to “dumb luck”. Those are predictable political responses. Both politicians however, and the journalists interviewing them, agree that it is a good outcome.
Why do people generally regard a surplus as “good” and a deficit as “bad”? A fiscal surplus generally means that we have paid more for public services than has been spent on their delivery. Don’t we usually call that a “ripoff” when it happens in private markets?
For example, in last week’s Saturday Paper John Hewson’s article – The dangers of the Coles and Woolworths duopoly – is about the burden of high prices charged by supermarkets, energy retailers, fuel companies and banks. Many firms in these sectors are using their market power to overcharge and accumulate high profits.
But when the government does the same, collecting taxation and other revenue from the community, and holding back on the provision of public services, it is generally seen as good economic management. There are no headlines stating “Government overcharges each household $1400 for public goods”, that figure being the fiscal impact of $19 billion taken from 13 million households.
Crispin Hull raises the same questions in his post The obsession with surpluses. In the current situation, of close to full employment and a little inflation, it does make sense for the government to run a small surplus. That’s conventional counter-cyclical management, and as Hull points out, use of fiscal policy to counter inflation is much better than the “sledge hammer” approach of monetary policy. That’s sensible policy for now, he stresses, but there is nothing intrinsically “good” or “responsible” about a government maintaining a fiscal surplus.
Hull explains that we have been conditioned over many years to see a surplus as “good” and a deficit as “bad”:
From the 1990s, the Coalition successfully convinced much of the broader community that its obsession with surpluses was warranted. However, that obsession disguised a more passionate, but flawed, agenda: that of reducing government spending and thereby lowering taxes, especially at the higher end, at the expense of government services. That has increased inequality.
Even though we have a combination of tight fiscal and monetary policy, there are still voices calling for more austere fiscal settings, particularly on the expenditure side, as if there is intrinsically more virtue in private sector activity than provision of health care, education and infrastructure.
As a case in point, on the ABC’s Breakfast program Patricia Karvelas hounded Finance Minister Katy Gallagher over the supposed inflationary impact of state governments’ expenditure on infrastructure, catching up on years of neglect, as if there is something frivolous or wasteful in governments providing the necessary public goods for our cities to remain as liveable places.