Recently, the Liberal Party inaccurately quoted the leader of the Reserve Bank in a feeble effort to defend their critique of government expenditures.
The vilification of public spending has been a tactic employed by conservative groups globally, as they attribute any economic issue to it.
Ted O’Brien, the Treasurer spokesperson for the Liberals, has reverted to the familiar argument that rising inflation and interest rates stem from excessive government spending.
O’Brien frequently claims that current government expenditures are at their highest point since 1986, discounting recessions.
This argument is somewhat misguided. Previously, the NDIS did not exist. If we exclude the additional expenses related to the NDIS, government spending isn’t exceptionally elevated.
However, the argument’s fundamental flaws were underscored last week when O’Brien and shadow finance minister James Paterson resorted to significantly misrepresenting the remarks of the Reserve Bank’s governor in a desperate bid to validate their claims.
In a statement released following the RBA's session with the Senate economics committee, they stated:
During questioning at Senate Estimates today, governor Michele Bullock concurred that government spending has represented approximately half of all GDP growth in recent years. When queried if this constituted ‘a substantial proportion,’ the governor answered, ‘Yes.
Unfortunately for O’Brien and Paterson, the dialogue was far more complex.
Bullock’s actual remarks were:
Yes, but I have previously emphasized that governments sometimes act in situations where, looking back at GDP growth and public contributions over the last few years, when private demand is weak, public demand often steps in to bridge the gap, which we have certainly seen across various periods recently.
Paterson, who evidently didn’t receive the answer he anticipated, replied:
Certainly, but if federal government spending is approximately one-quarter, and has maintained this share for two decades… if in recent years federal government spending has been responsible for half of all economic growth, that’s quite significant
Bullock interjected, saying:
That’s a contribution to GDP growth, and that shifts over time, heavily influenced by the private sector’s performance. If the private sector isn't contributing much in a cyclical context – for instance, if it’s in a recession – you would expect the public sector to account for a larger portion of the growth. That’s a cyclical occurrence.
Assuming he had caught her off guard, Paterson retorted, “Sure, but is it a sustainable occurrence? ”
At this juncture, Bullock clarified fundamental economic principles, stating:
Well no, it's a cyclical occurrence. . . sustainability isn’t really applicable here. As the economy recovers, generally, over a cycle, the public contribution should decrease.
So instead of simply saying “yes.”
This point holds significance as Bullock clarifies precisely what we are witnessing.
In the mining boom, the contribution to economic expansion from the private sector exceeded that of the public sector; however, this switched during the Global Financial Crisis. Treasurer Joe Hockey attempted austerity measures even as the private sector faced difficulties.
This approach failed.
During the Covid crisis, the public sector provided all of the support while the private sector declined.
In the last two years, the public sector was responsible for the majority of growth since the private sector was weak. As the private sector starts to recover, the influence of the public sector has diminished to a level not observed in over a decade:
This is fundamental economic knowledge.
Nonetheless, O’Brien and Paterson were not done misrepresenting the governor.
In their press announcement, they stated: “Bullock’s testimony was equally clear regarding inflation. When asked about the effects of increased government spending, she responded, ‘we anticipate that inflation would rise’. ”
Unfortunately for them, her response was not “equally clear. ”
Firstly, Paterson did not ask, What happens when government spending increases?
His precise question was:
If everything else remains constant, and the economy is at equilibrium or above its potential, what are the implications for inflation and interest rates when there’s a notable increase in government spending?
This question presupposes scenarios in which the economy is functioning at full capacity and the government suddenly makes a large increase in spending (i.e., “a notable increase”).
Bullock answered in a rather vague manner:
Once again, theoretically speaking, if total demand in the economy surpasses our projections, that would imply that our forecast would vary based on supply, and depending on our supply assumptions, we might expect inflation to be somewhat elevated.
Not quite as, the media release suggests, “RBA confirms Labor’s spending is driving interest rates up.”
The opposition’s argument also appears quite foolish considering that shortly after Bullock's testimony, GDP statistics were released indicating that the federal government's non-defence spending contribution had decreased again over the past year, aligning with levels from 2015-16 and being lower than figures from 2018 and 2019.
Government expenditure has often been vilified, yet one would hope that conservative groups in this nation are not so devoid of evidence that they resort to misrepresenting the head of Australia’s central bank. Unfortunately, this seems to be the reality for now.
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