Image for The Magic Wand of the Confidence Fairy

The preoccupation with debt and deficits that afflicted much of the discussion about the Federal Budget has carried over into the discussion following the Tasmanian State Budget.

The doctrine of surpluses being good and deficits bad as adopted by both major political parties and spruiked by 95% of the mainstream media means that as we are forced from deficits to surpluses as soon as politically possible, notwithstanding any adverse economic consequences that will almost certainly widen the output gap caused by unemployed labour and capital;  each budget will be contractionary relative to its predecessor and when Government surpluses eventuate the iron law of sectoral balances means the private sector (including the overseas sector) will inevitably be in deficit.

That’s the backdrop to the Tasmanian economy as it attempts to move forward.

The surplus cheerleaders conveniently overlook the fact that public surpluses imply private deficits.

With Tasmanian Gross State Product estimated to contract by 0.75% during 2012/13 the economy is a bit shaky.

Yet we are being asked by Opposition Liberals to believe they can move to surpluses and grow the Tasmanian economy simultaneously.


With a wave of the wand by the Confidence Fairy?

By the Government getting out of the way of the more productive private sector? And the old crowding out thesis doesn’t hold when there’s underutilised resources.

Someone has to run a deficit else nothing will happen.

The Federal Government is not constrained in the same way as is the State Government. Comparing the Federal Government to a household is simplistic nonsense. It is not revenue constrained and can ‘print’ money if needed (although the long term effects of this latter action is thought by some to be inflationary).

The State Government however, can’t print money and although it is not revenue constrained in theory, in practice it has become that way as it constantly erodes its tax base as evidenced by the latest changes to the payroll tax threshold.

Tasmania has elected to become a cork in the ocean, at the mercy of the elements. Batten down the hatches, reef the sails and pray.

There is no other plan ...

Read the rest of this stunning analysis on John Lawrence’s Tasfintalk, here

John Lawrence was 2011 Tasmanian Times’ Tasmanian of the Year for his ability to interpret arcane financials through forensic analysis ...

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