Letter from The Cape Podcast Episode 7 May 19, 2023 Hello, and welcome to another episode of the Letter from The Cape. When I was just a young boy we would march across to the local milk bar with a penny or two and then worry about whether we would buy 4 licorice blocks or a sherbet bomb with our cash. It was always a big decision, but if we wanted our mothers not to know that we had been eating sweets before dinner then it was the sherbet bombs that got the nod, because the licorice blocks, glorious though they were, had the unwanted effect of blackening our teeth and lips. The point though is that as young as that we were learning about the household budget. We were learning that our spending desires and plans were conditioned by financial constraints and that no matter how large our eyes were when we stared into the sweet cabinet in the shop, there was a choice to be made because we only had a penny or two. As we get older and have jobs and credit cards and all the rest of it, we refine that understanding into a concept of solvency - how to stay above water. Most of us learn to keep our spending within the financial constraints that we face. Some don't and suffer the consequences. We know that in order to spend we need to get income from some source; or run down our savings; or sell some item on Ebay; or, in the case of really big items like the purchase of a house, we need to find a bank or credit union that will to loan us the money. Our budgets occupy our minds every day. There is then a tendency to think that we can extrapolate from the daily experience with our own finances to achieve an understanding of the finances of the national government. And politicians exploit that tendency relentlessly and threaten mayhem if the government 'maxes out its credit card' or 'spends like a drunken sailor' or other metaphors that imply excess of the sort that we mostly avoid because it would bust our budgets. But because we think the government is just a big household, our own budget experience means we are manipulated into accepting a fictional world where government surpluses are deemed to be responsible and deficits dangerous that require 'repair'. Repair implies that something is broken. So when politicians and commentators respond the the announcement that the government is in deficit, we are trained to assess that situation as a failure of some sort or another which needs repair. By accepting the exhortations about the dangers of government spending and running deficits we then accept policy approaches that significantly limit the government's ability to meet the challenges that only it can meet on our behalf. And after this relentless campaign demonising government deficits, we start to realise that our basic public infrastructure is breaking down, that our hospitals are in crisis, that thousands of Australians are living in tents in one of the wealthiest nations on the planet because there is a major housing shortage. And we sit in our cars stuck in heavy traffic because there is in no adequate public transport in our area wondering what the hell is going on. We also see reports from various global agencies predicting an environmental disaster - an existential threat - yet our governments claim they are short of money to deal with it. But when we might lapse into thinking that our budgets somehow inform our understanding of the capacities of government, remember the MCG scoreboard. It can never run out of points because it issues them by pressing computer buttons that show up on the screen. We have learned in previous episodes that the national government also can never run out of AUD because it is the sole issuer. The government's fiscal position, which is usually referred to as 'The Budget' is not like a broken down car that needs some repairs. It is what it is and the way we should appraise it is in terms of what it is functionally achieving in terms of advancing human and environmental welfare rather than the numbers that come up on the scoreboard. Those numbers are largely irrelevant in their own right, even though the mainstream debate is constantly only focused on them - the size of the deficit, or the 'trillion dollars of debt'. The famous economist Abba Lerner developed the idea of 'functional finance' which emphasises that the purpose of government spending and taxation is to achieve goals that advance our well-being. The only questions we should ask is whether that purpose is being achieved? For example, if there is rising unemployment then we would assume the government is failing to fulfil its primary responsibilities. To reduce unemployment usually will require the fiscal deficit to increase. That should be applauded because cutting unemployment is a dramatic improvement in well-being - directly for those who now have work and their families that can enjoy the higher income; but also indirectly - because the rest of us should feel a solidaristic empathy with the disadvantaged. And if we don't sense that empathy, then we will still be better off because crime rates fall when unemployment is low - so our houses don't get broken into as much. And all of that tells us that using the term 'budget' in relation to government spending and taxation policies is bound to lead us back into thinking that our finances and the way we have to manage our household budget tells us something meaningful about the capacities of the government as the currency issuer. The reality is that our experience tells us nothing useful about the government fiscal opportunities and thinking that it does means we undermine our own prosperity by limiting the scope and size of the public sector. Sometimes a large deficit will be required to achieve the functional purpose. Other times a smaller deficit. In some cases, a surplus might be okay. Context matters and we usually are oblivious to that because we think the government fiscal capacity mirrors our own financial experience. I will talk more about that next time. Take care and see ya later. Now think about one of the big Stage 3 tax cuts tax the rich. limit fiscal space education