Tuesday, May 12, 2009

Australian federal budget, part I

Recently the Commonwealth's Federal Treasurer has presented his budget for 2009-10 (a more readable overview of it is at the ABC). For anyone who is careful with their spending and is concerned about peak fossil fuels and climate change, it makes depressing reading. The following, which will be a bit long so I'll split it into a few parts, will probably not be of much interest to non-Australians, though it does give an insight into many of the issues faced by First World countries these days: consumerism, debt, an ageing population who want to retire in idle comfort, and a wilful ignorance of resource limits and the environment.

All economies have different sectors:
  • agricultural, producing food, timber and fibres like cotton
  • mining, producing fossil fuels and minerals/metals like iron, salt and aluminium
  • manufacturing, taking fossil fuels and agricultural or mining raw materials and making them into products, eg timber into furniture, aluminium into cans, cotton into clothing, etc.
  • services, where people offer their knowledge or skills and usually produce nothing physical, eg lawyers, accountants, doctors, chefs, etc. 

Historically, countries begin with large agricultural sectors and a small service class (peasants and knights). They develop their mining and manufacturing, and the service class grows (industrialisation); they import raw materials and export manufactured goods, and become rich.

After a time they send their manufacturing jobs overseas to poorer countries, and the service sector comes to be the largest part of the economy. They import both raw materials and manufactured goods from poor countries, but live off debt and exploit the poorer countries by means of the International Monetary Fund, unfair trade agreements, and overt threats of force, all to ensure they get cheap stuff. Like the company store in a mining town, they don't produce anything but they own everything. Thus, the service economy. 

What would happen if the whole world industrialised and wanted to have mostly service economies is not clear. As Gandhi said, since the First World gets rich by exploiting the Third World, who would the Third World exploit? In the beginning they exploit themselves: with some 2 billion people in China and India alone still living on the land (agricultural) who'd be quite happy to see their country industrialise, running out of people to exploit isn't a problem we'll face in the near future. But in fact because of resource limits, they'll probably never be able to fully industrialise

Australia's economy, like that of many Third World countries, is based on "dig it up and sell it overseas." Only 10% of the economy's total money comes from agriculture and mining, and 68% from services. However, 57% of our export money comes from mining and agriculture. We export coal, gold, meat, wool, alumina, iron ore, wheat, machinery and transport equipment. The latter two are mostly foreign car makers with factories here, so while foreign money comes to Australia, it flows out again through those foreign countries. The mining and agricultural companies are mostly Australian, though we've started selling some of the mining companies off to the Chinese.  

The services exist on the back of the agricultural and mining sectors. To run a modern economy you do need a certain number of lawyers and accountants, and they'll want a certain number of hairdressers and coffee-makers. But in the end you have to actually produce something tangible to get the economy moving. In earlier times we manufactured things, but because we believe in free trade and at the same time want to pay less for stuff, the factories have moved to lower labour cost countries like China.

So we export raw materials, and import manufactured goods. Obviously manufactured goods are worth more than raw materials (a table costs more than the wood in it), so that has a large current account deficit - that is, we spend more than we earn. This leads to a large foreign debt.

There are four basic types of debt a country has:

  • Household debt, that of individuals and families
  • Government debt, when the government spends more than it brings in with taxes, it gets indebted
  • Commercial debt, the debts companies build up in operating or expanding themselves
  • Foreign debt, the money owed to people overseas

Obviously these are all mixed together. A company may borrow money from a foreign bank, so then it looks like we have $1 million of commercial debt and $1 million of foreign debt, $2 million debt, right? Nope, we counted it twice. It's just $1 million. So for simplicity, we'll ignore commercial debt, to give us a better picture of the overall situation.

Historically, Liberal/National federal governments in Australia make trade more liberal, increasing our foreign debt, and cut social spending (welfare, health and education), giving a federal budget surplus. Labor federal governments control or subsidise trade, and raise social spending, giving a federal budget deficit. However, this depends a lot on how much tax they can gather. When so much of the economy depends on commodities, if those commodities leap around in price, so does the tax we get from them. For example if we sell 100 million tonnes of coal at $200 per tonne, then later the price drops to $100/t, that's a difference of $10 billion in the economy, and something like $2.5 billion in federal government money. So that some Lib/Nat governments have had big deficits, and a few Labor governments big surpluses. The current Labor government had originally expected a large surplus, but is now looking at a large deficit.

Under the Howard federal government of 1996-2007, social spending was cut and trade liberalised. So government debt dropped to zero, while household and foreign debt went high. That is, as government offered less services, people had to increase their household spending to make up for it; if the government won't pay for your university education, you have to pay for it. And as less things were produced in the country, we bought them overseas. While the government praised itself for getting rid of government debt, it chose not to mention the blowout in household and foreign debt.
Debt as fraction of GDP
YearFederalHouseholdNet foreignTotal

The lesson is that whatever we do, we end up with some debt. If our economy were based on actually making things, rather than just digging it up and selling it overseas, our total debts wouldn't have increased. Still, some debt is inevitable, the only question is whether it's owed by the government, the people, and whether it's to foreign countries. Some argue that it's better to have privately-funded education or healthcare and the like, others that public is better. It comes to the same thing in the end, though. For example, from 1975 to 1987 or so, tertiary education was basically free in Australia. Then the government said "user pays!" and gradually introduced fees. However, the fees of doctors, laywers, dentists and so on then went up, because they had to pay for the education they'd got; and once they'd paid off their student loans they didn't then lower their fees, of course. So either way we pay for the doctor's education; we can pay today in taxes, or pay tomorrow in doctor's fees.

For these reasons, I don't have any aversion to government debt as such. Debt in general is bad, but government debt is not worse than household or foreign debt. With all debt, the important thing is how is the money spent? I can borrow $200,000 to buy a house, pay it off over 25 years, and in the meantime have a home. Or I can borrow $200,000 and blow it all on the pokies. I say that money is well-spent when you have something useful or nice to show for it afterwards, when you're building something your children and grandchildren can use. What will our government's A$57.6 billion debt get us this year?

Not much of use. Most of the debt is just borrowing to make up for lack of income. A friend of mine lost her job recently, and is now living on her credit card; her income dropped below her spending, but she's kept her spending the same. Similarly, because of the world economic downturn, the world's buying less of our coal, iron, grain and so on - so we have less money coming in, but want to keep spending the same. If government income drops, they can raise taxes, drop spending, or just go into debt. But if they raise taxes or drop spending when the economy is already in trouble, they push it over the edge into the shit pit. So they have debt instead, in the hopes that with all the government money flying around, some will stick and help things along.

I'll talk more about spending in part II.

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