David Littleproud & Co. Balancing the budget like a ’74 scout jamboree raffle

The federal budget is neither like a business nor like your personal accounts. Our politicians and many commentators do not understand how modern state finance works. david tyler explains.

The great tragedy of Australian politics is not that David Littleproud doesn’t understand how modern government finance works. The thing is, he has a lot of friends; The entire parliament, from Labor frontbenchers to backbenchers, has the same fossilized misconception as tablets from Sinai.

They read “balancing the books” like a prayer, unaware that they are worshiping an idol carved from their own ignorance and polished by fifty years of repetition.

For Littleproud and the entire parliament of serious amateur accountants, here is Modern Momentary Theory (MMT) explained with the frankness that the moment demands.

Commonwealth is NOT a business

Not a farm, a house, a football club or your strata committee. But Littleproud likes to stand in machinery sheds lecturing folks to tighten their belts.

But scan the benches; Labor ministers tout the same religiosity, state premiers signal fiscal probity, Green senators try to appear responsible for “the bottom line.” Even some coastal council treasurers between Kiama and Kalamunda are probably telling taxpayers that “we can’t afford” to fix the seawall right now.

They all repeat the same rhyme: “The state must live within its means.”

Except for the Commonwealth, which is the issuer of the currency. It doesn’t “live” in anything. It creates the dollars the rest of us need to live in.

Insisting that the Commonwealth could “run out of dollars” is like insisting Woolworths could run out of barcodes.

“Taxpayers money” is political ventriloquism

Whenever a politician wants to stop public investment, he says: “Taxpayers’ money!”

Bipartisan. Albo says this. Littleproud howls. State treasurers scream like cockatoos fighting over chips when it comes to budget time.

But the truth is very simple: First the state spends, then taxes.

Taxes do not finance spending; They release real resources, give value to currency, and shape behavior.

The idea that Canberra holds a giant jam jar labeled “Taxpayers’ Money” is a misconception shared across the political spectrum; It is equally valued by those who don’t want to spend anything and those who want to spend a little more with apologies. It would be fascinating if it weren’t used to justify neglecting hospitals, climate infrastructure, housing and the notion of a defensible public sphere.

Real function of taxation

If taxes don’t fund spending, what do they actually do? MMT identifies several critical functions that our politicians pretend don’t exist:

First, taxes increase the demand for currency. Why does anyone accept Australian dollars? Because the government demands that tax payments be made in Australian dollars. This creates underlying demand for the currency and gives it value. Without this tax liability, currency would be worthless paper.

Second, taxes regulate aggregate demand. This is the inflation control mechanism that politicians have completely misunderstood. When the economy heats up and inflation threatens, raising taxes pulls back the spending power of the private sector and cools demand without impairing productive capacity.

Third, taxes redistribute wealth and income. This is the function that politicians most avoid discussing because it reveals:

Tax policy is always about who has power and who doesn’t.

Progressive taxation, where higher incomes pay higher rates, could counteract the tendency of market economies to concentrate wealth. Capital gains taxes can slow the conversion of income into dynastic wealth. Wealth taxes can prevent the emergence of oligarchy.

But regressive taxation, GST, flat taxes, and payroll taxes that hit wages harder than capital are accelerating inequality. He takes resources from the few (most of us) and protects the fat cats; Those who have a lot.

Over the past four decades, Australia’s tax policy has been a masterclass in using taxation to redistribute wealth upwards. Negative gear. Capital gains tax relief. Retirement tax cuts benefit the wealthy more than workers. Franking loans are repayments that provide billions of dollars to those least in need. Capital flowed from the poor to the rich.

These are not accidents. These are choices. And these are the choices that become invisible when politicians claim that taxes finance spending rather than shaping distribution.

When Littleproud, Chalmers or Taylor talk about “taxpayers’ money” they hide the real question: whose money is being taken and whose money is being protected? MMT makes this question inevitable.

Finally, taxes change behavior. Cigarette taxes discourage smoking. Carbon taxes (if severe) would deter emissions. Land value taxes discourage speculation. Taxes on sugar, taxes on pollution, taxes on activities we want to see less of—these are tools for shaping economic activity toward the public good.

The “taxpayers money” myth obscures all of this. It treats taxation merely as revenue collection, when in fact it is a complex set of policy instruments for managing demand, allocating resources, and guiding behavior.

Politicians love this myth because it allows them to avoid bitter debates about distribution. It’s much easier to say “we can’t afford it” rather than “we chose to preserve wealth concentration rather than finance public housing.” It’s all about choices.

Budget surplus is economic vandalism

Virtually every Australian government, Commonwealth, State, Territory, even the occasional regional council with delusions of grandeur, likes to boast about redundancies. (But you might be too eager. Remember Josh Frydenberg’s comeback with the black fiasco.)

A surplus means that the government takes out more from the economy than it brings back.

When politicians of all colors boast about “budget repair,” what they mean is: “Look how responsibly we depleted your bank accounts.” It starves the services. It reduces private savings. It drives growth.

Government “debt” is the safest asset

This myth is shared by Labor MPs trying to appear grown-up, Liberals posing as accountants, Nationals hoping to appear tough.
State treasurers who think they are Robert Menzies. Media commentators use the phrase “gross debt” the same way preachers use the phrase “original sin.”

Government bonds are not borrowed from China or the Martians. These are debts of the same entity that issued the currency. They are an accounting tool and a stable savings tool.

The idea that the Commonwealth might “run out of money” is the most widespread, bipartisan, cross-jurisdictional hallucination in the country.

Government spending does not cause inflation

Every politician claims that inflation is caused by “waste,” “too much spending,” or “labor building too much stuff.” (Unless they’re in the office, in which case it’s “global.”)

MMT treats inflation as an adult constraint: a mismatch between spending and real capacity.

If we don’t have nurses, carpenters, transmission lines or housing stock, prices go up. This is a resource issue, not a moral failure.

The solution is not austerity theatre. This is capacity building; to educate people, expand infrastructure and mobilize idle resources. But this requires accepting that the Commonwealth has the financial capacity to do this, which undermines the whole “we can’t afford it” pantomime.

Government spending is not inherently inflationary. If there is unused capacity (unemployed workers, idle factories, underutilized infrastructure), government spending mobilizes that capacity without triggering inflation. Prices rise only when spending exceeds available resources.

This is where MMT fundamentally differs from the tales told by politicians. The constraint on government spending is not an imaginary budget limit. These are real resources: labor, materials, production capacity, technology, time.

Inflation occurs when spending (public plus private) exceeds the economy’s actual capacity to produce goods and services.

When demand exceeds supply, prices rise.

This is inflation.

During COVID, when economies were shut down and supply chains fragmented, massive government spending contributed to inflation as production capacity was deliberately constrained. The problem wasn’t expenses; The problem was broken supply chains and workforce disruptions.

Additionally, private sector spending can be as inflationary as public spending. When banks create loans for real estate speculation, raising house prices without creating new housing, this is inflation. When companies engage in price inflation during supply disruptions (as we saw in 2022-23), this is inflation.

But politicians only talk about government spending causing inflation because accepting private sector contributions requires regulation of capital. Moreover, politicians treat all spending the same because they are trapped in the myth of the household budget.

David Littleproud is certainly not wrong; he is just the man in Akubra’s version of an illusion that extends from Kirribilli to the Houses of Parliament and all the state treasuries in the country. The bipartisan belief that the Commonwealth Budget is a household ledger rather than an operating system of monetary sovereignty.

Money is not scarce. There is economic literacy and political imagination.

Interest rates remain. The Central Bank penguins are back.