Couch Potato

There’s a reason people say “ignorance is bliss”. Ignorance would stop one from getting riled up when one reads utter rubbish like “Scott Morrison finds $4 billion down the back of the couch“. According to The New Daily’s Money Editor, James Fernyhough,

The federal government has stumbled over an extra $4.4 billion, thanks to an unexpected boost in tax revenue and a drop in expenditure. The news, announced by Treasurer Scott Morrison and Finance Minister Mathias Cormann on Tuesday, reflected an unforeseen boost in economic activity in Australia.
The multi-billion dollar bonus does not mean that the government is out of the red – far from it. The budget for 2016-17 was still a massive $33.2 billion in deficit, meaning the government had to borrow that amount in order to fund its spending commitments.
But it means it had to borrow $4.4 billion less than it expected to back in May. As a result, the overall government debt expanded at a slower rate than expected. In total, the government now owes its lenders around the world $322.3 billion.

To suggest that the government “stumbled over” some money and has had to borrow less as a result is just factually wrong. The federal government does not borrow money. The federal government is the currency issuer. It is the only player in the economy who has that ability. If anyone else attempts to issue $A they will get a visit from the constabulary and a charge of forgery. So the idea that the federal government has to go out to “lenders around the world” to borrow the currency it – and only it – can issue is akin to saying that Qantas has to buy or borrow Frequent Flyer points from some market before it can issue them to its customers. Of course it doesn’t. Qantas can issue as many Frequent Flyers as it pleases, and it doesn’t need to get them from anywhere. They exist because Qantas issued them to someone. When that someone trades them back to Qantas in return for a service, they cease to exist again. So too every dollar exists because the federal government issued it into existence.

The back of that couch goes a long, long way. There is an infinite number of dollars down there. They are not a finite resource like gold. The only limit on their issuance is real resources and production: more dollars in the economy than idle productive capacity to absorb them and you get inflation.

Fernyhough goes on to say:

Where the money came from

In 2016-17, the government coffers took in a total of $409.9 billion, compared to the expected $405.7 billion. The lion’s share of that – $379.3 billion – came through taxation. The outperforming taxpayers were companies, consumers (via the GST) and importers (via customs and excise).
High income taxpayers contributed more than expected, while lower income taxpayers contributed less, bringing the overall income tax intake to sit around what was expected.
Non-tax receipts, which came from the sale of goods and services and interest on investments, stood at just over $30 million for the year.

Again, utter tosh.

There are no “government coffers” – the federal government does not run a bank account in a conventional sense, any more than Qantas have stocks of Frequent Flyers for a rainy day. The government does not recycle dollars – there’s no warehouse of them that must be stocked up before they can be issued on pension day. Every dollar the federal government spends is a new dollar that exists because it was spent by the federal government. So what stops all this money issuance causing inflation?

That’s where taxation comes in. It’s not the source of government funds, but the release valve that counteracts inflationary pressure. It’s the drain at the bottom that stops the flow from the tap at the top from overflowing the bath.

I have no idea what Mr Fernyhough thinks an “outperforming taxpayer” is. It’s not a term I’ve heard before, and I am hoping I don’t hear it again.

Where the money went

Over the 2016-17 year, the government spent a total of $438.9 billion, which was $1.3 billion less than it expected.

The savings came from slow take-up of the National Disability Insurance Scheme, lower-than-expected payments to states for infrastructure projects, and lower-than-expected spending on wage subsidies, among others.

These are not savings. There is no bank account to store such savings in. A more accurate way of stating this sentence would be:

the government reduced the size of the economy by $1.3 billion by withholding money from the disabled that they could have otherwise re-spent in the economy, by failing to invest in infrastructure projects and the employment that they would create, and by deliberately suppressing the spending capacity of wage-earners.

The article finishes with some quotes from Morrison about how he’s “keeping expenditure under control”. Nothing new there, our Treasurer has absolutely no idea what he’s doing. But Jim Chalmers (ALP) manages to keep the idiocy bipartisan, by blathering about “budget repair” and the size of the deficit.

The size of the deficit is not important. It is what it is. What matters is the level of unemployment and the level of inflation. To extend the earlier metaphor: do you care how many Frequent Flyer points Qantas have issued? Of course not. What matters is that there are not so many of them that Qantas could not provide the services to which holders of them are entitled when they want to claim them. That’s the employment/production equivalent in this metaphor, and if it’s not there when demanded, the value of those Frequent Flyers declines. You would need more of them to obtain the same service than you used to. That is the literal definition of inflation. It’s not the number of dollars in the economy that matters, but their stable purchasing power.

If the government allocated their resources and efforts in getting both unemployment and inflation below 2%, the economy would be in rude health. Focussing on the fiscal deficit or surplus is like a footy coach obsessing about the number of inside-50s their team takes, and not the scoreboard. It’s losing sight of the main game.

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