Thursday, April 18, 2013

Who will fill Australia's current policy vacuum?

In tax terms, hypothecation is the dedication of a particular tax for a particular purpose. This can make perfect sense. For example, a tax on fuel may be used to fund roads. In this case, it's a variant of the user pays principle and can offer real advantages over tolls. However, if the tax on fuel is part of a general tax applying to all or most inputs such as the GST, then it doesn't make sense; revenue is simply part of the general tax system.

Generally with a hypothecated tax, the amount you spend depends on the tax. No money, no spend unless you want to make it up from the general budget.

In the case of both the Minerals Resource Rent Tax and the Carbon Tax, the Australian Government effectively hypothecated a significant projection of the potential revenue to compensation and other activities. However, the scale of that spend was not flexible. The Government allocated revenue to fixed spend based on what now appear to be, at best, Commonwealth Treasury guesstimates. It's a bit like buying complex derivatives. You need to be aware of the assumptions or you will end up losing a lot of money. Now we all pay a price.

There was another problem as well. The Government committed a fundamental error. Instead of arguing the merits of the particular tax and articulating the issues involved including costs and possible compensation principles, the Government combined tax and spend in those pretty but boring paste graphic packages so beloved by all Australian Governments at all levels and then tried to sell the spend. How very NSW!

The commenters on this blog appear to share the general view that the policy positions of the current Gillard Government no longer count, but the opposition doesn't count either because, with the exception of the NBN, it doesn't have any articulated policies. With such a long period to the Federal election, a policy vacuum has been created. Into that vacuum others are now rushing to enter, including most recently the Business Council of Australia.

Maybe that's not a bad thing. The PM's decision to provide such a long lead time to an election has created a very rare position, one I think unique in Australian history. It's end April now. The current Government will probably go into caretaker mode in August. We have a number of months where neither Government nor opposition can control the policy agenda. Essentially, we can now chat among ourselves on what we consider to be important.

Of course, there will be special pleading. Both the Financial Review and the BCA are demonstrating elements of that at present. But seriously, there is a fluidity now in national debate that is most unusual, one in which the focus group driven atmospherics that usually drive high level political and policy debate actually don't count!

As the final election campaign kicks in, things will change.  In the meantime, let's make the most of it!

17 comments:

Scott Hastings said...

I believe this stagnation will continue for some time. It's important to remember that this is a half senate election. 7 of the 10 Green senators are not up for re-election, so the prospect of a major party getting a majority are very slim to nil.

Anonymous said...

Hi Jim

This is probably going to come off as na├»ve, and maybe off-point for your post, but I continue to wonder about the fetish of ‘balancing the budget’.

It’s fairly common to see that hoary old line about the government being no different to a corner store – “you cannot spend more than you earn” – but how is that relevant, really? I’d just like to pursue, for a moment, the life of a newly minted $100 bill: in an ordered economy it seems to me that this bank note will cycle through the economy many times before falling to bits (and even then you will be issued with a fresh one, ‘free' of additional charge). Now while sometimes the note could be used for a completely tax-free purpose, there are many more times when it will pass from one holder to another, and attract tax, duty, or some other government impost.

If that is the case, then I suggest that the specific bank note, issued by the government, will eventually return to the government not only its full face value, but much more in terms of government revenue. In a closed system (and Aus is not) this means that sooner or later the government will have access to far greater funds than it issues as cash. Taking extremes, if every time the note is used there is an average 5% impost, then it only takes 20 transactions to ‘break even’ and thereafter is a net money-earner. Or, say I use it to buy a new vehicle, and it in turn is used to purchase cigarettes or alcohol, and then in turn for petrol for the car; it would probably return in excess of 20% to the government in each of those transactions – i.e. in five transactions it has ‘paid’ for itself – leaving any further transacting pure ‘profit’ for the government.

It just seems to me that in our ultimate closed system (planet Earth) there is an inevitable gathering of funding into government coffers of amounts far in excess of that which the governments have issued for transaction purposes – so why the impractical holy grail of a ‘balanced budget’?

It makes sense for the corner store, but I am thinking it is ultimately impossible – or at the least, irrelevant - at government-level accounting.

kvd
Ps feel free to bin

Evan said...

I think the big questions are sustainability and equity.

With Anon I'm sceptical of government being compared to a corner store. It doesn't take into account investments or buying something over time (mortgages tend to get left out of the housekeeping analogy).

There has been a change I think in values since the neo-liberal gained dominance from 'fair go' equity to taxation having an illegitimate feel. And the rich getting richer.

Anonymous said...

Jim

Just to maybe translate my off-topic above comment back to policy considerations: let's say the National Disability initiative is going to 'cost' an additional $1Bn per annum. (it could be $2 or $10; I've not bothered to look up the figure, just using that policy as an example).

The main question seems to be "where are you going to get the funding from" to which the reply is the inevitable "from cuts, savings, and other revenue sources - but it will be fully funded".

As a general comment, what's the problem with printing an extra $1Bn and 'paying' for it with that? The government will, in due course through an unspecified number of 'cycles' inevitably receive that money back into its coffers - plus, plus, plus. Is my naive point.

It's actually a bit like a favourite childhood game - Monopoly - but with every throw of the dice, and purchase, and sale, attracting a 10% banker impost. My thought is the players would soon need the bank (i.e. the government) to issue more play money :)

kvd

Jim Belshaw said...

Hi Scott. I wonder about that, the prospects of the coalition not getting a majority. I haven't run the maths, but I would have thought that the Coalition vote was now so high that they must have a chance.

I'm not so sure about the stagnation, though. Part of my point was that if the parties continue to spend all their time contemplating each others' political navels in the way they are doing at present, it may actually open up debate elsewhere.

Jim Belshaw said...

kvd, I'm not sure of your analysis here. You seem to be expressing the original Keynsian multiplier! Like you, I don't understand the balanced budget fetish, although I do think it desirable that government's balance budgets over the life of the cycle so far as current expenditure is concerned.

Jim Belshaw said...

Hi Evan. It's interesting with sustainability and equity. Equity is a value concept. Sustainability may have values attached, but it's more of an economic concept.

Jim Belshaw said...

Okay, kvd. Assume, for the moment, that the supply of goods and services is limited. If you then spend on an activity by printing money, you increase increase demand for the limited supply and prices go up.

Anonymous said...

Thanks Jim. Believe me I'm not trying to be clever. More just trying to understand why budget deficits are so reviled, when as far as I can see all money introduced into the system seems to end up back in the government coffers, given enough transactions.

Anyway, as I said, probably naive.

kvd

Jim Belshaw said...

I didn't think that you were, kvd. It's a discussion!

Anonymous said...

Jim

Now that this post has 'receded into the past' - and so maybe I won't make so much of a fool of myself - I wanted to make further comment on your mention of the 'Keynsian multiplier'.

I understand that theory, but I was more simply fascinated with the 'life' of that $100 token dollar bill. Accepting that printing money isn't the best or only means of revenue raising, it still seems to me that the issue of that face value token is possibly returned many times over during its existence.

While some transactions are revenue neutral (your assessable income is my deduction) there will be many transactions involving that note when the government 'clips the ticket' - be it GST or petrol excise, or stamp duty, etc.

It's what Arthur used to call "a good little earner" - no?

kvd

Jim Belshaw said...

In the days when certain Australian banks used to issue their own money, kvd, my memory is that Governments charged a 3% tax on note issues. The notes were redeemable for sterling. Some notes were lost, that's a straight profit, others came back in the form of deposits for re-lending. Used to fascinate me as a kid. I give you a loan in my own money, charge you interest on it, you spend the loan and the money comes back to me! I then lend it again.

Now going back to your original example and limiting the discussion just to transaction taxes. Whether the Government gets the money back in taxes depends on the impact on the total volume of transactions. If the economy is running at full stretch, the total volume of transactions may not increase. The extra Government funded transaction substitutes for another transaction. Price effects, inflation, may however increase nominal government revenues. The extent to which the Government's real tax revenues increase, depends upon the extent to which the extra money increases the volume of transactions, ie economic activity; we are back to the multiplier again.

I am working on my assessable income!

Anonymous said...

If kvd's argument had any validity, Zimbabwe would have been on the path to untrammeled enrichment!

Anonymous said...

Hi Anon - I do understand your reference - but that of itself doesn't take away from the fact that a government receives an actual benefit from the endless recycling of its currency.

It is this latter point I'm (badly) trying to get my head around - not the debasement of a currency by unlimited printing.

But even on your point: which came first? The hyperinflation, or the printing? I'm not sure the money printing was a 'cause'; maybe more an inevitable outcome?

kvd

Jim Belshaw said...

In Zimbabwe's case, kvd, the printing press was used for the deliberate enrichment of some.

On the endless recycling of money, some of the issues go back to an earlier discussion on the role of money. Money is a means of exchange and a store of value. Just from a tax perspective, I suppose that one could say that Governments benefit when they supply just the right amount of money to maximise the value of transactions over time and hence the tax tax.

Anonymous said...

It seems there are hobbyists for just about anything you can think of:

http://www.moneytracker.com.au/note/5745.html

- that link is from a site which tracks the 'sightings' of Australian banknotes, but I include just one specific page noting that one specific $100 note has thus far recirculated 20 times.

Fascinating stuff, even if you allow for possible trolling, which might possibly be offset by unrecorded transactions/uses?

kvd

Jim Belshaw said...

How interesting, kvd! And Odd. There have to be a number of untracked sightings. And some of the tracked sightings? Mmm.