FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.

posted on 01 May 2016

Five Budget Myths That Refuse To Die

from The Conversation

-- this post authored by Phil Lewis, University of Canberra; Ian McAuley, University of Canberra; John Daley, Grattan Institute; John Wanna, Australian National University, and Richard Holden, UNSW Australia

In the lead up to the federal budget on May 3, we asked five experts to dispel some of the most common myths associated with government budgets.

1. The federal budget is like a household budget

Richard Holden, Professor of Economics, UNSW Australia

The federal budget is nothing like a household budget. Not even a little bit. The key difference between government finance and household finances is that households have a finite life span, but the government does not (even when there is a change of leader or political party in power).

As individuals we typically take on debt early in our lives to invest in a home and education, and pay it back later in life in order to (ideally) pass on something to our children. Governments, by contrast don't have this kind of end point where everything is brought to account.

Now, that doesn't mean that governments can rack up unlimited amounts of debt - far from it - but they can live with positive amounts of debt indefinitely. The calculus is really about making investments that return more than the interest cost on debt.

To be clear, governments should not fund recurrent expenditure with debt except in times of crisis (like 2007-8). But the idea that governments should aspire, as households often do, to have zero debt is deeply flawed and runs counter to how the most prosperous economies have done things for centuries.

2. Any increase in tax will harm the economy

Ian McAuley, Lecturer in Public Sector Finance, University of Canberra

While Prime Minister Malcolm Turnbull and Treasurer Scott Morrison may have differing views on tax policy, on one aspect they seem to be in strong agreement: there should be no increase in taxes as a share of GDP. The Labor opposition, although less explicit, has carefully crafted its policy proposals so as to be revenue-neutral.

This constraint on tax policy has gone largely unchallenged, and that may be because of a widespread perception that Australia is "a high-taxing, big government country" according to the 2015 Per Capita Tax Survey.

The reality, however, is that in comparison with other prosperous developed countries, Australia is a country of low taxes and small government. Among the world's 18 most prosperous developed countries (OECD countries with per capita GDP greater than US$35,000), our taxes at 34% of GDP (24% Commonwealth, 10% state and local) compare with an average of 44% for that group of countries. Over recent years only the USA and Switzerland have had lower taxes than Australia (32% and 33% respectively).

As for the idea that high taxes impede economic growth, evidence from these countries does not support the proposition. The graph below shows for the seven years 2007-2013 (the range of comparable OECD data), average taxes and economic growth. There is no evidence of any negative relationship. In fact, if anything, there is a small positive correlation, suggesting that perhaps high taxes and high economic growth go together, but it would be cheeky to draw such a conclusion, as the coefficient of correlation is very low.

Our book Governomics: Can we afford small government? (Ian McAuley and Miriam Lyons) suggests what counts in economic performance is not the size of government, but, rather, its quality - the capacity of public agencies to operate with efficiency and responsiveness where markets fail.

3. Australia's government is too big - smaller government could help fix the budget

John Daley, Chief Executive Officer, Grattan Institute

Many believe that Australia has relatively large government, and that the key to budget repair is smaller government that will lead to faster economic growth and a stabilised budget.

While there are many reasons to prefer smaller government, particularly promoting the scope for individuals to make choices that shape their own lives, smaller government is unlikely to solve Australia's budgetary problems. Across the OECD, there is no obvious relationship between size of government and size of government deficits.

In any case, Australia has relatively small government. Although government expenditure is currently towards the upper limit of historic expenditure, Australian government expenditure is low relative to the OECD. This is so, even if compulsory superannuation contributions are taken into account. Australian governments spend less in most categories. In particular, welfare spending is relatively low due to Australia's highly targeted welfare system.

Data for countries marked with an asterisk are for 2013; Turkey data is for 2012. OECD/Grattan Institute

4. Every treasurer works closely with Treasury

John Wanna, Sir John Bunting Chair of Public Administration, Australian National University

Budgets are comprehensive and complex beasts, that defy close management by any member of the political executive; teamwork across the core executive rather than inspirational involvement from a motivated treasurer are the essence of a good budget process.

But many Australians and most of the Canberra press gallery believe that when a government is labouring away preparing their annual budget, the treasurer of the day is ensconced in the Treasury, feverishly casting an eye over reams and reams of data and figures.

Treasurers and finance ministers are responsible for different parts of the budget. Treasurers look after the broader economic strategy, and authorise the detailed economic data contained in the important Budget Paper No 1. They set spending limits for both the federal government and inter-governmental transfers (Budget Paper no 3) and then focus on the revenue side, considering whether to increase any taxes or offer tax cuts to sweeten the budget. Treasury decides whether the budget will be contractionary or expansionist in nature.

In reality, some treasurers and finance ministers don't spend much time with their own departments in the immediate lead-up months to the Budget. Kim Beazley and John Fahey spent almost no time with their staff when they were finance ministers, relying instead on their advisers to do the leg work. Nick Minchin, Lindsay Tanner and Penny Wong were more active finance ministers. John Howard, Paul Keating, and Peter Costello spent considerable time with Treasury officials often setting up their ministerial office in the department in the immediate days before the budget was presented to Parliament. They demanded a close relationship with their senior officials to craft the final budget speech, often rehearsing it in the Treasury department of their parliamentary office.

Federal Treasurer Scott Morrison speaks to Secretary To the Treasury John Fraser. David Moir/AAP

5. Printing more money will fix the economy

Phil Lewis, Professor of Economics, University of Canberra

For households and firms any excess of spending over income must be financed by borrowing and accumulating debt. Governments, however, have an option not available to the rest of us and that is "printing money" (in practice this means a data entry in bank accounts rather than actual printing of bank notes).

The basic principle is that the central bank, in our case the Reserve Bank of Australia (RBA), can provide money to the government, without the government having to pay interest or repay the debt. The central bank can create debt-free money out of nothing! No wonder printing money looks an attractive option.

The policy has generally fallen out of fashion among economists but has recently experienced a revival among central banks in the USA, Europe and Japan through its closely related cousin, Quantitative Easing (QE), as governments attempted to revive flagging economies after the global financial crisis. The two differ mainly in the way monetary expansion is financed. (There is not space here to explain further but there is a relatively clear explanation here).

Proponents of QE try to distance themselves from the criticisms of printing money by proposing that QE has a different purpose. Under QE a central bank creates new money and uses it to purchase assets from other banks. The money the banks receive for the assets makes it easier for firms and households to obtain loans, interest rates fall and consumers and businesses will borrow and spend, boosting expenditure on goods services and investment which increases employment and GDP. Unfortunately, falls in real interest rates to zero or negative have been singularly unsuccessful in reviving economies, particularly Japan. With the apparent ineffectiveness of QE there is talk of resorting to the money printing option.

Most textbooks point to the role of monetary expansion in fuelling inflation. Extreme examples are the hyperinflation experiences of Germany between the two World Wars and, more recently of Zimbabwe. There is little doubt that if printing money is successful in reviving an economy eventually there will be inflation. Most central banks, particularly the RBA, have set controlling inflation as their major goal of monetary policy.

Printing money also removes an important constraint on irresponsible government spending. Do we really want governments to be able to spend at will as they see fit? Money creation might seem like a "free lunch" in that governments can increase spending without raising extra taxes, but eventually spending must be paid for by households and firms meaning less productive activity, employment and growth.

Do you have a question on the budget or a fact you'd like checked? Leave a question in the comments below or request a FactCheck at Please include the statement you would like us to check, the date it was made, and a link if possible.

The ConversationPhil Lewis, Professor of Economics, University of Canberra; Ian McAuley, Lecturer, Public Sector Finance, University of Canberra; John Daley, Chief Executive Officer, Grattan Institute; John Wanna, Sir John Bunting Chair of Public Administration, Australian National University, and Richard Holden, Professor of Economics, UNSW Australia

This article was originally published on The Conversation. Read the original article.

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical Opinion Post Listing

Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, using Livefyre just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.

You can also comment using Facebook directly using he comment block below.

Econintersect Opinion


Print this page or create a PDF file of this page
Print Friendly and PDF

The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.

Take a look at what is going on inside of
Main Home
Analysis Blog
A Short Note on a Connection Between Marginalist Economics and Folk Medicine
Run A High Pressure Economy? Janet Yellen Does Not Understand the Problem
News Blog
A Pony And His Beloved Teddy Bear Reunite After Being Apart For 3 Years
October 2016 Kansas City Fed Manufacturing Remains In Expansion
September 2016 Median Household Income Not Statistically Different Than The Previous Month
September 2016 Pending Home Sales Index Improves
22 October 2016 Initial Unemployment Claims: Rolling Averages Marginally Worsen
Durable Goods New Orders Marginally Declined in September 2016
Infographic Of The Day: 41 Interesting Facts About Tesla Motors
Early Headlines: Asia Stocks Down, Oil Lower, Great Lakes Wind Power, Chinese Moving Mfg To US, Tesla Reports Profit, Dems Forecast To Take Senate, China's Debt And More
How Miller Stacks Up Against His Draft Class
Inside The Machine: How Two Nobel Winners Taught Us How Companies Tick
Healthcare's Dirty Little Secret: Results From Many Clinical Trials Are Unreliable
The Cleveland Indian's Unique Use Of Andrew Miller
What We Read Today 26 October 2016
Investing Blog
Thirsty For Income? How To Thrive In This Yield Desert
Apple's First Annual Sales Decline In 15 Years
Opinion Blog
A Hard Brexit And Reduced Migration Won't Benefit UK Workers
What Triggers Collapse?
Precious Metals Blog
Inflation Surging As Platinum Signals Stock Market Decline
Live Markets
27Oct2016 Market Update: Wall Street Flat, Crude Prices Recovering, US Dollar At Resistance And Gold Struggling At Support
Amazon Books & More

.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Middle East / Africa
USA Government

Crowdfunding ....



Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day


Asia / Pacific
Middle East / Africa
USA Government

RSS Feeds / Social Media

Combined Econintersect Feed

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution



  Top Economics Site Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2016 Econintersect LLC - all rights reserved