Tasmanian Times

The individual has always had to struggle to keep from being overwhelmed by the tribe. If you try it, you will be lonely often, and sometimes frightened. No price is too high for the privilege of owning yourself. ~ Friedrich Nietzsche

The individual has always had to struggle to keep from being overwhelmed by the tribe. If you try it, you will be lonely often, and sometimes frightened. No price is too high for the privilege of owning yourself. ~ Friedrich Nietzsche

Article

It’s austerity. Let’s call it what it is …

Flickr of RHH

This is what we know. The hospital system is being starved of money. Hundreds of millions of dollars in GST funding intended for health is not being spent on health. State employee wages are being kept artificially low. Other services – housing, welfare, TAFE, community services, courts, police, roads, transport – are all being seriously under-funded.

We do not need to pay down debt. Net debt is strongly negative, which means the government owes to others more than $300 million less than others owe it.

So where is all the money going?

It’s a deceptively simple question with no easy answer. But government policy is based on a hard political ideology: our taxation is too low, and we are allergic to debt – even what Scott Morrison calls ‘good debt’, that which funds productive infrastructure.

The Commonwealth Grants Commission, which doles out the GST, calculates that if the Tasmanian government’s own tax take was the same as the average of all states, we would be raising over $500 million more than we do. But they take into account that we have limited options: not much of a minerals industry, relatively little manufacturing or other industry, and so on. The Commission distributes GST money from other states to make up for our inability to raise as much tax as others. But it also calculates that if we had the average rate of taxation ‘severity’ we would raise about $250 million a year more than we do. And they don’t compensate us for our below-average taxation rates. And since those figures were calculated, Mr Gutwein has again cut payroll tax.

That shortfall has to be made up, and it comes out of government expenditure. Services, particularly health, are cut.

But that doesn’t account for more than part of the story. On the basis of figures from the Australian Institute of Health and Welfare, I calculate that the Tasmanian government’s contribution to overall health funding is between $100 and $150 million a year less than the national per-capita average.

The Commission also gives to us a great deal of money – $300 million this year alone – so we can fund the extra services our population needs. If that money was being spent on health, we would be spending far more than the national average. But, as we have seen, the government is spending at least $100 million less. So by definition, none of that $300 million health-specific GST money is going into health. Mr Gutwein’s answer to this is that he’s allowed to take it away from health and use it as he likes. He is, but that doesn’t mean he should.

So in health alone, $400 million-plus of GST money is being diverted. And in 2015-16, according to Productivity Commission data, welfare was similarly punished by $55.7 million, services to communities by $90.3 million, justice by $70.9 million, roads by $33.5 million, and transport by $33.5 million. On the other side of the ledger services to industry gained $48.5 million above Grants Commission averages and “other” gained $48.5 million.

Clearly, lower taxation alone cannot explain shortfalls of this magnitude. Something else is soaking up this money.

The answer is that it is being used to pay down debt – refusing to roll maturing government bonds over when they become due even though the interest rate would now be cheaper – and because the government refuses to borrow even for productive infrastructure such as building hospitals, roads and schools. Any company, and almost any government, funds most infrastructure through borrowings. This evens out the payments over a longer period instead of accruing all at once. Even more importantly, it means that money doesn’t have to come out of recurrent expenditure.

Mr Gutwein sees things differently. He is allergic to all debt – any debt, for any purpose.

The reason infrastructure is usually funded through borrowings – apart from the reasons above – is that the sums work out. Let’s take an example.

In 2016 Tascorp, the borrowing arm of the Treasury, issued a 30-year bond at 4.35% per annum. This wasn’t for the government: it was for other Tascorp customers such as TasWater, UTAS and TT Line. So the government pays the owner of the bond $4,350,000 a year for 30 years and, at the end of that period, pays the original $100 million to whoever by then owns the bond. At first glance this looks like a bad, expensive deal. But it’s not, for two reasons: one, inflation; two, the return we get on what we build with that money.

If we assume an average annual inflation rate of 2.5%, the real value of those annual repayments fall every year. At the end of the 30 years, the real value (in 2046 dollars) will have fallen to $2,087,484.

A similar thing happens with the principal. When it becomes due the real value of that $100 million will have shrunk to $47,988,133.

Meanwhile, the community will have all the economic and social benefit of that hospital, road or school. The measure of that benefit – called social return on investment – is the way serious infrastructure authorities calculate whether a project is worth funding. Infrastructure Australia and Infrastructure Victoria do it this way. Infrastructure Tasmania is not equipped to make those calculations.

According to the literature, most decent infrastructure projects in developed countries such as Australia have an annual return on investment of between 10% and 15% a year. So let’s see what happens when we apply a 10% return to our local example.

This time, inflation works the other way: its output will be worth more next year than this, so we must inflate the figure rather than deflating it. So, again, assuming inflation at 2.5%, the social value of that $100 million will be $10,250,000 the year after, $10,500,000 the year after that and so on. By the end of 30 years (and let’s say that is also the life of the infrastructure involved) it will be $20,464,074.

Let’s add all that up. At the end of 30 years, which is for the sake of argument the life of the bond and of the infrastructure built with that money, the total (real, inflation-adjusted) costs will be $140,576,265. And the benefits will have been $439,027,032, giving a net return of $298,450,767 to the community. That is why the right sort of borrowing is a good thing.

Tasmania does not have a debt problem and has not had one for many years. According to this year’s budget papers, the government’s total interest payments will be $9 million. But it will make $20 million from lending money to other people.

Economist Saul Eslake wonders whether the government is following this path at least partly because of concern about its long-term superannuation liability. He points out, rightly, that the fund established for this purpose by former Labor Treasurer David Crean was later raided by Labor Premier David Bartlett and is no more. According to this year’s budget, superannuation costs will peak in 2022-23 at 5% of the total budget before declining. Five per cent of this year’s budget would be a shade over $300 million – a lot of money, but hardly crippling. And why, if this is the cause of all the austerity, has the Treasurer just reduced payroll tax again?

The only plausible explanation is that the government is deliberately reducing the size and scope of the public sector, with little regard to what that means to health and other services. In other words, austerity.

The economic notion behind austerity as I think the government and its advisers see it, is that a larger public sector “crowds out” a more productive and efficient private sector; and therefore, by cutting the public sector, we will have greater prosperity courtesy of a supercharged private economy. This appears to be what Mr Gutwein meant when he proclaimed that Tasmania was entering a ‘golden age’.

The theory of ‘expansionary austerity’, much beloved by right-wing governments, emerged among Austrian economists between the wars and has powered the economic policies of many countries since the election of Ronald Reagan and Margaret Thatcher.

From the 1930s to the 1970s, Keynesian economics ruled throughout the world, following the Great Depression, which discredited the conservative, small-government approach of the 1920s and earlier. Keynesianism fostered the welfare state, the notion of a mixed economy (between public and private, drawing on the strengths of each), stimulating the economy with government spending in bad times and cutting back again in good times to prevent booms from turning into bubbles.

Then, in the 1970s, came the era of stagflation: economic stasis, combined with high inflation (and a consequent erosion of the value of assets). Keynesians had no answers: these things were not supposed to happen together. So Keynes was discredited and the opposite approach, taken up from the 1930s Austrians and the 1970s Chicago school around Milton Friedman – all highly conservative people who wanted a smaller and smaller role for government – took over. Ronald Reagan summed up this attitude with the famous line that ‘government is not the answer: government is the problem’.

So there were 40 or more years of privatisation, a running down of the welfare state and of the public sector generally. Then came the global financial crisis and everything changed. The ruling conservative economists had no answers: it wasn’t supposed to happen. The pendulum swung again, and the world has been slowly and unevenly turning back to Keynes (or versions of him).

For that 40 years, almost all governments in the developed western democracies followed, more or less, the same script. Centre-left governments did it too, though usually less brutally than the conservatives. Now, in the post-GFC world where the nostrums of Reagan and Thatcher are no longer palatable and known to be ineffective, it is taking a long time for politicians to adjust to the reality.

Following the GFC, two highly influential papers drove the policies of the European Central Bank, the European Union and the Conservative government in Britain.

A series of papers by Italian economist Alberto Alesina and several co-authors were particularly influential and drove European authorities into austerity policies which they believed would produce large-scale growth and get them out of the slump. We all know what happened: it didn’t work. This approach implies that the economy is a zero-sum game, that one person can do better only if another does worse. That might have seemed to work in the artificial world of some academic macroeconomists, but reality behaves differently.

When you take money out of an economy, growth decreases. You can have growth despite austerity but never because of it. And austerity in the public sector will always reduce private sector growth.

Alesina’s papers were seriously shonky. They have been meticulously taken apart by some of the world’s most respected economists, including Nobel laureates Joseph Stiglitz and Paul Krugman. The paper claimed to find a number of examples in which countries with austerity policies had experienced good growth, but its basic mistakes were so great that it didn’t realise – or didn’t acknowledge – that in fact these economies had not expanded at all but contracted. Nevertheless, it was enormously influential and has caused untold misery for many millions of people.

The other paper, Growth in a Time of Debt, was by Harvard economists Kenneth Rogoff and Carmen Reinhart.  They argued that debt above 90% of GDP was particularly harmful to economic growth but made basic mistakes in a spreadsheet, embarrassingly discovered later by a postgraduate student, that fundamentally skewed their results. One authoritative review concluded that ‘coding errors, selective exclusion of available data, and unconventional weighting of summary statistics lead to serious errors that inaccurately represent the relationship between public debt and GDP growth among 20 advanced economies in the post-war period’.

But even if ‘expansionary austerity’ could work at a national level, it could never be successfully applied to an Australian state. At the state level, public and private sectors are not in competition with each other. In all the major areas in which the state government works, the private sector is largely absent. Nobody expects Healthscope to take over the Royal Hobart Hospital: the reverse is in fact more likely. How could fee-paying private schools replace government schools? Are roads to all have tolls on them? Who will run the courts and the police? There is simply no possibility of the public sector in Tasmania crowding out the private sector.

And with less money going into the economy, and with fewer government employees each earning lower wages, we have lower consumption and a less prosperous private economy than would otherwise be the case.

The government is not listening to any of this. There is no evidence that they care what is happening in public hospitals. No matter what doctors, nurses and patients say, no matter how strong the evidence is, they will continue along the route they have set.

Martyn Goddard is a public policy analyst based in Hobart.

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3 Comments

3 Comments

  1. Russell

    November 26, 2018 at 7:19 am

    Where’s the money going? To maaates in big business peddling products which are nothing but poisonous or socially harmful.

    BUT then they also make money pretending to fix the problems they cause. A bit like Monsanto selling a ‘magic bullet’ product which doesn’t actually work and causes superweeds which requires a ‘new improved’ version every couple of years. It’s easier to sit on your fat lazy arse spraying the land and yourself and others with a tractor tank full of military-grade poisons rather than turning or scratching the soil or pulling up weeds.

    Meanwhile the hospitals and counselling services are bursting at the seams with sufferers from these ill-health products. Who cares though? – there’s plenty of money to be made from it for some!

    I hope there’s a huge class action soon against Governments, businesses and individuals allowing and promoting this crap to continue and flourish. Otherwise you’re going to have protests, like in France, flaring up all over the world until the Governments and aristocracy are brought to their knees, ala the French Revolution.

    • davies

      November 26, 2018 at 12:59 pm

      The French protests are in response to the elites jacking up diesel prices by 23% to pay for climate change policies. I quite agree. Promoting ‘this crap to continue and flourish’ will result in more and more protests by the ordinary citizen!

      The essay seems to be missing an important conclusion. What is the ‘ideal’ economic solution? Which country taxation/economic policies are worth replicating here? What is the appropriate level of public spending? Provide examples!

      Explain why the 1920-21 Depression, which was as severe as the Great Depression, lasted only 18 months. What did Government do differently to its response to the Great Depression?

      Pick out Britain or Sweden, which did not follow the IMF mantra of printing money and spending more, and compare them to the European countries that did print more money and increase Government spending. Which performed better?

      Economically, how is Tasmania faring versus other jurisdictions? Is unemployment going up or down? How does it compare historically? What is happening with our GDP? Growing, flat, or decreasing? Again how does it compare historically?

      • Russell

        November 27, 2018 at 7:09 am

        What’s your point?

        Money isn’t the answer. Money is worthless on a dead planet. You can’t eat money and you can’t drink oil. Endgame.

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