Get that dog off the table!

During World War II, the states agreed to relinquish their power to levy income tax and make it solely a federal government responsibility. For some reason, Malcolm Turnbull thinks that should be revisited.
I’m all for having “everything on the table”, but there are some things that do not belong on the table, like shoes, the family dog, or de-federalisation. Truly, this is a thought bubble that needs to be popped, quick-smart. It seems to have come from nowhere, and hopefully will return to the same place.
As many other commenters have said, for a party that prides itself on reducing taxes and red-tape, this does seem like a strange policy to consider. For businesses operating nationally, this adds enormous complexity to their business arrangements, payroll and who knows what else. Where is the benefit? The whole thing seems to be predicated on the idea that the states are lazy, inefficient and that somehow the invisible hand of the market will solve this at a stroke by introducing competition between them. Really? A few years ago we had a lot of talk about the “two-speed economy”. How is an eight or nine speed economy going to be an improvement? Does anyone really believe that the states are not doing the best they can with the resources they have?
The point of government is to provide the services that we as a society demand for our well-being, that the private sector cannot or will not provide. The private sector will not voluntarily build national infrastructure, or provide for the security, health and education of the nation’s citizens. And nor would we expect them to do so. The government can of course purchase their services to assist in these aims, but the private sector is not going to do them as charitable works.

Federation saw the conversion of this continent into a Nation, rather than a balkanised collection of nation-state colonies, each going their own way and doing their own thing. The states are still responsible for the provision of services, but within a national framework with a single sovereign currency. Although this is a vast improvement on the 19th century arrangements, it is not without its problems. Chief amongst these is what’s called “vertical fiscal imbalance”, where the federal government is responsible for collecting money, and the states are responsible for spending it. Whilst this was always an issue, there has not been sufficient appreciation of how the floating of the dollar has fundamentally changed the game.

A little sidetrack into Modern Monetary Theory.

Prior to 1982, the $A was a ‘convertible currency’ – that is, there was a fixed exchange rate of $A for £GB, of around 2:1. In order to support that, Federal government was limited in its capacity to spend by its holdings of British pounds, since holders of $A could demand at any time that these be converted to £GB. Increasing spending was known as “printing money”, which would lead to a change in the exchange rate of $A to £GB. China’s yuan is still managed this way, probably the only major pegged currency that remains. The US dropped the gold standard in the 70s, and we floated the dollar in the early 80s. The obvious and intended consequence of that decision is that the government has fiscal freedom, no longer attempts to manage the exchange rate, but allows it to float based on international supply and demand for Australian goods and services, and vice versa.
So now our currency is ‘fiat’, or non-convertible. It has no “inherent” value, in and of itself. It is not equivalent to a certain amount of gold or GBP or anything else. All of it is printed. When the government spend money, they spend it into existence by putting it into the bank accounts of recipients. When you pay your taxes, the reverse happens, and those dollars simply cease to exist. The federal government has no great pot of money that can only be replenished by you paying your taxes. They can never run out of money. They can issue too much, which could lead to inflation, but they can never run out. Taxes don’t pay for anything at the federal level. Their main purpose is to keep further government spending from being inflationary, but that is not a dollar-for-dollar thing – there are far too many moving parts for that, and very few of them are within the government’s control. So when there is an imbalance, you have a fiscal deficit or surplus. Simple as that.
The federal government ISSUES the currency, and we USE it. We cannot issue our own currency, and neither can state governments. Users of a currency cannot spend what they don’t have unless they choose to go into debt. And herein lies the problem.

The Aussie-Zone

So now we understand that the federal government has no physical constraint in any way as to how many $A they issue, but state governments do. So what Turnbull is proposing is to “fix” this vertical fiscal imbalance by making it worse. From a macroeconomic perspective, what he’s proposing is simply a terrible idea. It is bad enough that the lion’s share of funding to the states comes via the GST – a perniciously regressive and unnecessary form of taxation anyway – but now the states will compete amongst each other for taxpayers’ dollars. The carve-up of GST is a big enough mess of controversy as far as equity is concerned, this idea can only make it far worse.
The point of the European Monetary Union is that all the members share the common currency. This was supposed to bring a bright new age of benefits to all participating EMU members, but in fact it has been a disaster. All the EMU countries have given up their own currencies, and all of the policy space that having a fiat currency provided them. Now none of them control it. They effectively have a pegged currency regime where their Euro is 1:1 convertible for anyone else’s Euro. Each country in the EMU competes with each other, and it has sucked the life out of the smaller members, to the benefit of the largest ones, and of course the banks.
Ultimately, Turnbull’s de-federalisation concept leads to an Australian equivalent of the Euro-Zone: a collection of heterogeneous nation-states sharing a currency they don’t control, and competing amongst themselves for everything else. Capital and Labour moving around the country to wherever they think they can get the best advantage, and the poorest states falling further and further behind. Tasmania and NT will be the equivalent of Greece and Portugal, and NSW and Victoria the Germany and France of this scenario. All the while, the banks will make out like bandits, providing credit to revenue-constrained states and acquiring the real resources that are the property of the states and the people in return: through privatisation, sale of government assets and so on. It is a ridiculous way to run a nation.

Education and Health

We currently have a situation where there are insufficiently resourced schools all around the country. At the same time, there are unemployed teachers. This is a ludicrous state of affairs. The federal government ultimately picks up the tab for the cost of that unemployment. They would be far better served employing every teacher who wanted a job in a school. At the macroeconomic level, it increases GDP, reduces unemployment, and the payment of that teacher gives them spending power that drives the economy as it cycles around, until it is eventually reclaimed through the tax drain.
In the previous paragraph, substitute nurse for teacher and hospital for school, and the same principle applies.
Both of these areas are not zero-sum games. The education and health of the populace are the key drivers of our prosperity, even more so in the ‘new economy’. It’s a fact that every dollar spent on education pays manifold dividends over the life of the student. If you want to solve underemployment, crime, ghettoisation and entrenched poverty, education is the key. It is the nation’s investment in its own future.
To not fund the education of our children is the true ‘intergenerational theft’.
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About ret56fe

Ohhh, that guy.
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