Wednesday, March 22, 2023

How can Australia pay $368 billion for new submarines? Some of the money will be created from thin air

A good explanation of how deficit budgeting works below. But the bottom line remains that we will all have to spend less to cover the purchase of these pointless submarines

Australia's decision to buy three nuclear-powered submarines and build another eight is so expensive that, for the $268 billion to $368 billion price tag, we could give a million dollars to every resident of Geelong, or Hobart, or Wollongong.

Those are the sort of examples used by former NSW treasury secretary Percy Allan on the Pearls and Irritations blog, "in case you can't get your head around a billion dollars".

Such multi-billion megaprojects almost always go over budget.

For instance, when then prime minister Malcolm Turnbull announced the Snowy Hydro 2.0 pumped hydroelectricity project in 2017, it was supposed to take four years and cost $2 billion. The latest guess is it'll actually take 10 years and cost $10 billion.

So to pay for those two megaprojects alone, there's an awful lot of money we will need to find from somewhere. Or will we?

'No simple budget constraint'

In the first year of the pandemic, Australians were given a glimpse of a truth so unnerving that economists and politicians normally keep to themselves.

It's that, for a country like Australia, there is "no simple budget constraint" — meaning no hard limit on what we can spend.

"No simple budget constraint" is the phrase used by Financial Times' chief economics commentator Martin Wolf, but he doesn't want it said loudly.

The problem is, he says, "it will prove impossible to manage an economy sensibly once politicians believe there is no budget constraint".

A quick look at history shows he is correct about there being no simple budget constraint, despite all the talk about the need to pay for spending.

As you can see below, Australia's Commonwealth government has been in deficit (spent more than it earned) in all but 17 of the past 50 years. The US government has been in deficit for all but four of the past 50.

There is no hard limit on how the Commonwealth can spend over and above what it earns, just as there's no hard limit on how much you and I can spend. But whereas you or I have to eventually pay back what we have borrowed, governments face no such constraint.

Because the Commonwealth lives forever, it can keep borrowing forever, even borrowing to pay interest on borrowing. And unlike private corporations, it can borrow from itself — borrowing money it has itself created.

Governments create money

That's what the Morrison government did in 2020 and 2021, in the early days of COVID.

To raise the money it needed for programs such as JobKeeper, the Government sold bonds (which are promises to repay and pay interest) to traders, which its wholly-owned Reserve Bank then bought, using money it had created.

The Government could have just as easily cut out the traders and borrowed directly from its wholly-owned Reserve Bank, using money the bank had created — effectively borrowing from itself. But the Reserve Bank preferred the appearance of arms-length transactions.

And there's no doubt the Reserve Bank created the money it spent, out of thin air. Asked in 2021 whether it was right to say he was printing money, Governor Philip Lowe said it was, although the money was "created", rather than printed.

People think of it as printing money, because once upon a time if the central bank bought an asset, it might pay for that asset by giving you notes, you know, bank notes. I'd have to run my printing presses to do it. We don't operate that way anymore.

These days the Reserve Bank creates money electronically. It credits the accounts of the banks that bank with it.

One way to think about it (the way so-called modern monetary theorists think about it) is that none of the money the Government spends comes from tax.

The Government creates money every time it gets the Reserve Bank to credit the account of a private bank (perhaps in order to pay a pension), and destroys money every time someone pays tax and the Reserve Bank debits the account.

If it creates more money than it destroys, it's called a budget deficit. If it destroys more than it creates, it's called a budget surplus.

Too much spending creates problems

Can the Government create more money than it destroys without limit? No, but where it should stop is a matter for judgement.

If it spends too much money on things for which there is plenty of demand and a limited supply, it'll push up prices, creating inflation.

Where to stop will depend on how much others are spending.

If there's little demand (say for builders, as there was during the global financial crisis) the Government can safely spend without much pushing up prices (as it did on builders during the global financial crisis).

If it wants to spend really big (say on building submarines), it might have to restrain the spending of others, which it can do by raising taxes.

But it's not a mechanical relationship. The main function of tax is not to pay for government spending, but to keep other spenders out of the way.

If the economy is weak in the decades when the subs are being built, the burst of government spending will be welcome, and needed to create jobs. There will be no economic need to offset it by raising tax.

But if the economy is strong, so strong the Government would have to bid up prices to get the subs built, it might have to push up tax to wind other spending back.

This truth means there's no simple answer to the question "how they are going to pay for subs?" — just as there was no simple answer to questions about how to pay for a much-needed increase in the JobSeeker, or anything else.

The deeply unsatisfying answer is that, from an economic perspective, it depends on who else is spending what at the time


Pauline Hanson shuts down proposals for rent to be paid to Aboriginals because their land was stolen and issues a very blunt message to Indigenous leaders

One Nation leader Pauline Hanson has blasted a movement calling for Australians to pay a weekly rent to Indigenous groups based on their ancestral claims to the land.

She branded the movement - backed by First Nations senator Lidia Thorpe - as an 'outrageous' money grab based on greed and 'racist identity victim politics'.

In a blistering attack in Parliament, senator Hanson savaged the 'Pay The Rent' movement supported by senator Thorpe and feminist writer Clementine Ford.

'The idea that Australians should pay rent for living in their own country is offensive,' she said in a speech to the Senate on Monday.

'It's based on the idea that only Aborigines own Australia. They don't. Australia belongs to all Australians.'

She insisted that anyone born in Australia has equal claim to the ownership of the country, regardless of any Indigenous heritage.

'We have all contributed to this country and we all share in its achievements, failures, resources, disasters, virtues, values and shortcomings,' she said.

'The only good thing about the race-based rent idea is that the activists who want it reveal their true motivation. It’s not about ‘justice’ or ‘redress’. It’s just about money – other people’s money. It’s just about their greed.

'If this mob succeed in their bid for a race-based Voice to Parliament, it’s only a matter of time before this idea is on the political agenda. 'It’s only a matter of time before non-aboriginal Australians are forced to pay yet more tax – a race-based rent tax.'

She claimed that system would be abused and the money diverted away from those most in need. 'As usual, the Aboriginal industry will keep all the money and truly disadvantaged Aborigines in remote communities will continue to suffer poverty, unemployment and crime,' she said.

'One Nation calls on all sensible Australians to reject this discrimination. 'We urge the government to audit the Aboriginal industry, and to finally act to fix the real problems in Aboriginal communities.'

The 'Pay the Rent' model movement allows homeowners to pay a percentage of their income to a body led by Aboriginal elders without any government oversight.

One per cent of weekly wages is the level suggested by Robbie Thorpe, a veteran Aboriginal rights activist from Melbourne who ran a similar scheme in Fitzroy in the 1990s.

Under the suggested one per cent - with the median Australian employee's earnings of $1,250 per week - it would cost each Aussie around $12.50 a week, or around $650 a week.

Mr Thorpe aaid the rent scheme is 'a rational, reasonable, responsible means of reconciling 200 years of unchecked genocide, as far as I'm concerned'.

Proponents say it could then be extended to all users of the land, with people holding weddings or organising concerts also encouraged to hand over money.

On the eve of Australia Day, senator Thorpe said: 'It assists sovereign grassroots fight the many campaigns and struggles we face everyday. 'Pay the rent from grassroots for grassroots. No strings attached to government agenda. '

Author Clementine Ford added: 'We need to stop paying lip service to decolonisation and start paying the rent to the First Nations people.'


Coalition won’t block Voice referendum machinery bill

The Coalition will not stand in the way of a bill establishing the architecture for the Voice referendum after spending weeks threatening to block it.

Labor’s referendum machinery bill will pass the parliament imminently after the Coalition dropped its demand to provide equal funding to the Yes and No campaigns in the referendum to be held between October and December.

The bill proposes to modernise how referendums are conducted by replicating the features of a federal election, including establishing a new financial disclosure regime for private fundraising by the Yes and No camps

Winning the support of the Coalition, whose leadership argued in favour of doing a deal in a partyroom meeting yesterday, means the government will not need to deal with the Greens to pass the law.

Senior Coalition frontbencher Simon Birmingham said the opposition did not get everything it wanted, but was satisfied the referendum would be conducted with integrity.

Country Liberal Party senator Jacinta Price, a leading opponent of the proposed Voice advisory body, announced today that she may cross the floor and vote against the bill.


Let’s stop pretending we are going to recycle all this plastic

The report in this newspaper that Australia stands no chance of reaching its goal of recycling 70 per cent of its plastic waste by 2025 is at once depressing and predictable.

Most of our single-use plastics cannot be recycled into a useful product at a reasonable cost. As voters and consumers we keep pretending it can, because we like plastic. It is cheap and useful.

So governments and industry go along with the charade, providing us with pantomime recycling efforts.

In turn, petrochemical companies, facing the end of the fossil fuel era, happily increase production.

You need only compare the economics of recycling streams to get a sense of how useless most of our waste plastic is.

Most metals and glass can be recycled endlessly, exhibiting the same quality in each of its new lives. That’s why people pay for scrap metal, while we had to pay China to take our waste plastic.

In 2017, China finally tired of taking the world’s plastic waste and banned new imports, leaving the rest of us to scramble to find something to do with our growing stockpiles.

In Australia, we have seen the collapse of REDcycle, the nation’s largest waste recycling scheme, with admissions that thousands of tonnes of warehoused plastic is bound for landfill.

In Europe, much of it is burned for energy in machines that might not release particulate pollution but do release carbon dioxide into the atmosphere – burning plastic is after all burning oil.

In other parts of the world, plastic simply chokes rivers and seas and the creatures that live in them.

The New South Wales environment watchdog has issued ‘clean-up’ orders to the supermarket giants for 15 warehouses and storage depots around the state where soft plastics have been stockpiled.

Whether plastic is dumped under the ground or into the ocean, or burnt for energy, all plastic will eventually end up as a greenhouse gas.

In fact, according to analysis published in February by the Minderoo Foundation in conjunction with the global energy analysis firm Wood McKenzie, the climate consultancy Carbon Trust and KPMG, single-use plastics now generate as much greenhouse gas emissions as the United Kingdom.

Minderoo’s second Plastic Waste Makers Index found growth in single-use plastics made from fossil fuels was 15 times that of recycled plastics, and that between 2019 and 2021 global use of them surged from 133 million tonnes per year to 139 million tonnes, or about 1 kilogram per person on earth.

ExxonMobil remains the largest producer of polymers bound for single-use plastics – responsible for six million tonnes in 2021 – followed by China’s Sinopec, which produced 5.8 million tonnes, and US-based Dow third.

Growth in single-use plastics production was driven by demand for flexible packaging such as films and sachets, which grew from a 55 per share of all single-use plastics in 2019, to 57 per cent in 2021.




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