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GST: It’s not a pie

Greg Jericho writes in his latest piece “Scott Morrison’s next trick – selling a GST revenue cut to every state bar one” that:

Perhaps the most accurate statement in the Productivity Commission draft report on horizontal fiscal equalisation (HFE) is when it notes that “there is a dearth of public understanding of how HFE works, and this is compounded by the lack of a strong neutral voice in public discussion”.

He’s probably right, but all the graphs and charts in the article don’t really cut through to the heart of the matter. And that is that all this banging on about “zero-sum game”, “winners and losers” and fighting over an equitable share of the GST is predicated on the complete falsehood that tax payments fund government spending. They simply don’t – dollars are not a resource that gets recycled. Every dollar of federal government spending is the birth of a brand new dollar that exists because the government spent it into existence, and every dollar returned to the government through taxation is the death of that dollar. A dollar not currently in the economy does not exist, for all intents and purposes. The federal government cannot run out of dollars, any more than Coles can run out of Fly-Buys, or Qantas can run out of Frequent Flyer points. Now of course, if your economy is overpopulated with dollars, and you have more of them currently “living” (in circulation) than things to buy with them, you get inflation. And that – inflation – is the real limit on government spending.

Money is being issued constantly by the Federal Government. Every pension day, several million bank accounts have their balances increased with a few keystrokes. With every tax return, PAYG paypacket and BAS statement, bank balances get reduced again. (To be clear: this is nothing to do with note-printing. The RBA’s role as the physical printer of currency is not what I’m talking about. There is vastly more money in the economy than there are notes and coins. The decision to physically manifest dollars as paper money is purely a function of demand from banks, when their customers want to convert money as recorded in a bank account to its physical equivalent, for personal commerce.)

It’s crucial to understand that the issuing of money is not inherently inflationary. To assume that you must assume that the size of the economy is fixed, or its productive capacity is maxed out. And clearly neither of those things are true today. As I said previously, inflation occurs when the dollars available outstrip the things you can buy with them. Too much money chasing too few goods. There is no other sane definition.

There is no reason whatsoever that GST should be a pie the states fight over. To switch metaphors, Federal Government spending is actually more like a magic pudding – you can eat too much, but you cannot run out.

And this is what makes me so angry about this hypothecation of “GST revenue” as income of the individual states. When you get down to it, what is the role of government? Is it not to ensure the security, health, education and welfare of its citizens? So the idea that we must fund our education and health – the nation’s investment in its own future – from the vagaries of the consumer spending cycle has got to be one of the most idiotic economic own-goals ever kicked. Even by Costello’s standards as a thorough economic charlatan, this is epic stupidity.

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Hypothecation, Jam Jars and Locked Boxes

In his speech on Thursday, the irrepressibly ignorant Scott Morrison made some very dubious claims about the Medicare levy. As Gabrielle Chan reported in the Guardian’s Politics Live thread:

In arguing the case for the Medicare levy rise, Scott Morrison has said in future, the government wants to lower taxes – apart from increasing tax for the NDIS.

Asked if 100% of the levy rise would go toward the NDIS, Morrison says:

“100%, all of it.”

The treasurer makes this point and while I usually speak Morrison, I am having trouble with this one. I think his main message it that the levy will be put in a separate bucket, otherwise known hypothecation.

“In the future, governments like our government would want to reduce taxes … if it was a Bill Shorten government he would want to increase taxes. In either case, the way this is designed is that the levy at 1% out of the total 2.5%, that would be secure so governments could on transfer payments, welfare payments, make whatever changes a government may wish to make but the funding flow from the Medicare levy would be secure.”

Gabrielle Chan goes on to comment later in the thread:

I want to go back to hypothecation (because it’s such a alluring term) and the idea that the Medicare levy increase for the NDIS goes into a locked box.

Fairfax’s Peter Martin addressed this issue back in February.

“In reality there are no locked boxes. Clause 81 of the constitution says “all revenues or moneys raised or received by the executive government of the commonwealth shall form one consolidated revenue fund, to be appropriated for the purposes of the commonwealth in the manner and subject to the charges and liabilities imposed by this constitution”.

There are no separate jam jars.

But it hasn’t stopped the governments of all persuasion from acting as if there are. The best-known is the Medicare levy, which we are told funds Medicare and the National Disability Insurance Scheme, but which in reality goes straight into consolidated revenue (and couldn’t anywhere near fully fund them in any event).”

Sorry, Gabrielle, but Peter Martin led you up the garden path as well. There’s not only no jam-jars or locked boxes, but no consolidated revenue either. Money that returns to the government through taxes does not get recycled. There’s no warehouse that your tax dollars end up in, waiting to get re-spent. Tax dollars cease to exist, and every dollar the government spends is a brand new dollar, brought into existence by the act of issuing it.

Taxes don’t pay for anything. What they do is drain money away, thus making room for further non-inflationary government spending.

The government does not need this tax to fund NDIS, or anything else they do. Not only is hypothecation an utter crock, all discussion of “but how are you going to pay for it?” totally misrepresents how a sovereign currency functions.

The government’s role is to ensure that the real resources (human and physical) available are put to work in the most optimal manner possible, for the betterment of the country now and into the future. And the issuance and reclaiming of dollars is a tool at their disposal to orchestrate that.

At the moment we have willing human labour going underutilised, the limited resources being consumed as if there’s no tomorrow, just so the government can feel good about the number of dollars (the one thing they have in limitless quantity) they’re issuing, as if that means anything real.

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GST on imports: plumbing new depths in stupidity

I thought the Backpacker Tax was the high watermark of brain-dead macroeconomics, but it turns out this government is capable of anything, and not in a good way. So just how stupid is this proposal to apply GST to privately imported goods purchased through international sellers? Let me count the ways:

  1. So much argy-bargy, so little money. This is something that the GST on Imports shares with the Backpacker Tax. It raises such a pathetic amount of money it is simply not worth bothering with. This policy is expected to raise $300M over 4 years. That’s $75M per year. To put that in perspective, the federal government expects to collect $63B (that’s Billion) in GST in FY2017/18. So this sop to the Gerry Harveys of the world is worth just 0.1% of GST. And that’s before we even discuss the cost of implementation.
  2. So little jurisdiction. The federal government does not have the power to levy taxes in foreign countries. It is completely unclear how they think they can impose this tax on companies that have no presence in Australia. I can easily imagine a scenario where unscrupulous sellers collect the GST when selling to Australian customers, and quietly trouser it. What’s to stop them?
  3. So little business acumen. How much is it going to cost to collect this tax? Currently any import of less than $1000 in value is not subject to GST, because it is not worth the while of Customs, the Post Office, the Tax Office or any other agency to recoup the money. Now it’s feasible that the cost of recoup has gone down since that decision in 1999/2000 (when the GST was first implemented). Perhaps the threshold should be reevaluated, but removing it completely? How can it possibly be cost-effective to recoup GST on a $4 parcel from Hong Kong?
  4. So little business understanding. This GST collection is supposedly going to be imposed on Ebay. That shows that the government have no concept of how Ebay works. You don’t actually buy anything from Ebay. Ebay is a marketplace that brings buyers and sellers together. When you buy something on Ebay, you pay the seller directly. The seller is charged by Ebay for their use of Ebay’s service. To suggest that Ebay are liable for the GST is like saying Westfield should pay the GST on behalf of their tenants.
  5. So little so late. This policy is well past its use-by date. Joe Hockey first proposed it. Back when he was Treasurer, the $A was buying $US1.10, and that made foreign goods pretty attractive. Now, the dollar hovers around $US0.73, which has put the handbrake on private imports in a big way. Even if this policy was a good idea when it was first broached (and it wasn’t), you would still have to ask the question whether there’s any continuing need for it.
  6. So little fiscal necessity. There’s not room in this post for the full MMT discussion, but taxes don’t fund spending. The government does not need this money, regardless of whether it’s the pitiful amount under discussion or some massive chunk of cash. This policy simply trims the public’s purchasing power by 10% when privately importing goods and services. It in no way changes the government’s ability to fund services or people.
  7. So little consistency. This government have made a great virtue of their “repeal of red tape”. It would seem that small government, light-touch “invisible hand” leave-it-to-the-market philosophy doesn’t apply when we’re talking about big donors like Gerry Harvey.

That’s seven reasons why GST on imports is bad policy off the top of my head. No doubt there are more. I can’t see any angle from which it makes the slightest economic sense to implement this policy, unless you’re Gerry Harvey.

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More Goodies and Baddies

So on Thursday morning we were greeted by the thoroughly unedifying spectacle of Federal Treasurer and Irredeemable Incompetent Scott Morrison pitching up the idea that there is now “Good Debt” and “Bad Debt”. You have got to be kidding me. After years of relentless talk of “Debt and Deficit Disaster”, people are starting to notice that under this government, the debt and deficits continue to climb, yet unemployment remains stubbornly high, inflation has been well below target, and consumer confidence is shot. Which begs the question: what the hell are they spending this money on? It clearly isn’t going anywhere useful.

So now ScoMo is going to rewrite the rules, and retrospectively declare some debt good, and some bad. Furthermore, entire functions of government will be rated on their net debt, as if the whole thing were some corporation implementing an internal charge-back model, rather than, well, government programmes: doing the unprofitable things of positive social worth. It’s just idiocy. You don’t have to be Einstein to figure out that this is going to lead to an apples and oranges comparison of all debt under Labor, versus (what they hope will be) a downward trajectory of “bad debt” under their so-called superior economic management. Ignore the “good debt”, nothing to see there, folks! That’s investment! Jobs and Growth. Just ignore that man behind the curtain.

So how will debt be classified?

This unmitigated disaster of an NBN, that will be worth a fraction of what’s been spent on it when completed, that’s a “good debt”, presumably? Obviously welfare will be “bad debt”, that goes without saying. Where does the Health Insurance Rebate fit? How about the Chaplaincy programme? Wars on Terror etc?

This mob truly are irredeemably incompetent. They’re obsessed with what the ratings agencies think of them despite it being of zero consequence to anyone, and fixated on how many dollars they can claw back out of the economy, as if they’re some scarce resource we might run out of, rather than the renewable fuel necessary to makes the economy work.

And whilst they bloviate, millions of hours of productive human potential are wasted every day, lost forever.