COVID-19 caused enormous suffering and hardship, socially, economically and personally. Some were directly impacted more than others but no one remains untouched. We learned new ways of doing things and there are positive outcomes. Let’s hope the lessons that have seen the Australian economy survive COVID-19 aren’t quickly forgotten.
Debt and deficit fears were put to one side as the federal government upped its borrowings. Such was the size of the intended borrowings there were not enough bank reserves for the task. The only way to create reserves is for the federal government to spend money by making deposits into private banks. To do this the Reserve Bank of Australia (RBA), the federal government’s bank, started buying government bonds from private bondholders thereby restoring the bank reserves of private banks. This is Lesson One for me. Spending precedes taxing and borrowing, not the reverse as we’ve been led to believe. It’s a crucial difference. Understanding the correct sequence must surely be a prerequisite for sound policy.
The almost universal view of the need to live within our means makes little sense if spending is first required to create the necessary reserves before taxes can be paid or borrowings undertaken. That’s Lesson Two. Federal debt is now $800 billion. Of that, the RBA owns 15 per cent or $120 billion, due to the bond purchases. The government owns the RBA. So, if the government owes money to itself it’s not a debt that will ever burden future generations. As commentator Alan Kohler pointed out, the bonds could be cancelled without adverse effects. Lesson Three for me is that government debt is of little consequence if the debt is owed to the RBA. This follows the pattern elsewhere. Central banks in Japan and UK own more than 40 per cent of their governments’ debt. In the US the figure is 23 per cent.
Every time reform is proposed you can guarantee someone will assert money doesn’t grow on trees. It may not, but it can be created out of thin air just as the RBA has been doing to finance its bond purchases. Lesson Four is that the federal government can create money any time it likes simply by crediting third party bank accounts. We are constantly reminded that such money-printing may lead to inflation and we need to resist the urge. But it’s no different to any other spending by the federal government. All spending is effected by simply crediting bank accounts. Will it be inflationary? Economists mostly agree that with so much underemployment and spare capacity, inflation is the least of our current worries. If you need to be convinced, look to Japan. That’s Lesson Five.
Lesson Six is that direct spending is more effective than measures like tax cuts which are more likely to lead to greater savings or asset price bubbles as has occurred, rather than trickling down for the benefit of all. We can employ more people and provide more services without the current self-imposed restraints, which dare I say it, are ideological rather than evidence-based or prudent.
What could we achieve by heeding the six lessons? For a start we could permanently lift almost everyone out of poverty as occurred when JobSeeker was raised. No longer are there convenient excuses via cliches about living within our means and refraining from burdening our kids with debt. It is the federal government that has the power to pull the necessary levers, if the will is there.
With federal actions and support, we could tackle all other problems like hospital waiting lists and social housing which governments only halfheartedly deal with because they refuse to spend when they can and refuse to increase taxes for fear of losing votes. Does anyone seriously believe the Tasmanian health system is sustainable in its current form, with demand and costs growing faster than revenue?
Does anyone seriously believe the private housing market with settings that favour current owners and investors will be able to meet future needs when wage increases will always lag house price increases? Big changes are needed.
As well as acquiring Australian government bonds on the secondary market, the RBA has been buying bonds issued by all state governments. The stated reason for this intervention is that it helps keep interest rates lower as states borrow to fund deficits needed to recover from the pandemic.
The RBA now owns $24 billion worth of bonds issued by all state governments. Of the total, $259 million is bonds issued by Tascorp, our state government’s finance arm.
This debt is of lesser consequence because it is owned by us via the RBA and will likely be written off at some stage, not completely dissimilar to the $158 million of federal/state housing debt written off. Forgiving a debt will only be a paper entry with no inflationary consequences as the money will have been spent years before the writeoff event.
Federalism needs to be reworked to help make states more sustainable and assist them to provide better services. Our present path with little or no appetite for reform is unsustainable. The lessons of the pandemic are there for all to see. Let’s not forget.
The Mercury, Wednesday 3 March 2021Go Back