Australia's decision to buy three nuclear-powered submarines and build another eight is so expensive that, for the A$268 billion to $368 billion price tag, we could give a million dollars to every resident of Canberra if we limited it to residents over the age of 15.
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Those are the sort of examples used by former NSW treasury secretary Percy Allan on the Pearls and Irritations blog "in case you can't get your head around a billion dollars".
And these multibillion-dollar megaprojects almost always go over budget.
When Prime Minister Malcolm Turnbull announced the Snowy Hydro 2.0 pumped hydroelectricity project six years ago it was going to take four years and cost $2 billion. The latest guess is it'll take 10 years and cost $10 billion, and so on.
There's an awful lot of money we will need to find from somewhere. Or will we?
No simple budget constraint
What we were given a glimpse of in the first year of the pandemic is a truth so unnerving economists and politicians normally keep to themselves.
It's that, for a country like Australia, there is no simple budget constraint.
"No simple budget constraint" is the phrase used by Financial Times chief economics commentator Martin Wolf, but he doesn't want it said loudly.
The problem is, he says, "it will prove impossible to manage an economy sensibly once politicians believe there is no budget constraint".
A quick look at history shows he is correct about there being no simple budget constraint, despite all the talk about the need to pay for spending.
There is no hard limit on how the Commonwealth can spend over and above what it earns, just as there's no hard limit on how much you and I can spend, but whereas you or I have to eventually pay back what we have borrowed, governments face no such constraint.
Because the Commonwealth lives forever, it can keep borrowing forever, even borrowing to pay interest on borrowing. And unlike private corporations (which also live forever) it can borrow from itself - borrowing money it has itself created.
Governments create money
That's what the government did in 2020 and 2021 in the early days of COVID. In order to spend on programs such as JobKeeper, it sold bonds (which are promises to repay and pay interest) to traders, which its wholly owned Reserve Bank then bought using money it had created.
The government could have just as easily cut out the traders and borrowed directly from its wholly owned Reserve Bank using money the Bank had created, effectively borrowing from itself, but the bank preferred the appearance of arms-length transactions.
And there's no doubt the Reserve Bank created the money it spent, out of thin air.
Asked in 2021 whether it was right to say he was printing money, governor Philip Lowe said it was, although the money was "created" rather than printed.
"People think of it as printing money, because once upon a time if the central bank bought an asset, it might pay for that asset by giving you notes, you know, bank notes. I'd have to run my printing presses to do it. We don't operate that way anymore."
These days the bank creates money electronically. It credits the accounts of the banks that bank with it.
One way to think about it (the way so-called modern monetary theorists think about it) is that none of the money the government spends comes from tax.
The government creates money every time it gets the Reserve Bank to credit the account of a private bank (perhaps in order to pay a pension) and destroys money every time someone pays tax and the Reserve Bank debits the account.
If it creates more money than it destroys, it's called a budget deficit. If it destroys more than it creates, it's called a budget surplus.
Too much spending creates problems
Can the government create more money than it destroys without limit? No, but where it should stop is a matter for judgement.
If it spends too much money on things for which there is plenty of demand and a limited supply it'll push up prices, creating inflation.
Where to stop will depend on how much others are spending.
If there's little demand (say for builders, as there was during the global financial crisis) the government can safely spend without much pushing up prices (as it did on builders during the global financial crisis).
If it wants to spend really big (say on building submarines) it might have to restrain the spending of others, which it can do by raising taxes.
What matters is what others are spending
But it's not a mechanical relationship. The main function of tax is not to pay for government spending, but to keep other spenders out of the way.
If the economy is weak in the decades when the subs are being built, the burst of government spending will be welcome, and needed to create jobs. There will be no economic need to offset it by raising tax.
If the economy is strong, so strong the government would have to bid up prices to get the subs built, it might have to push up tax to wind other spending back.
This truth means there's no no simple answer to the quesiton "how they are going to pay for subs?" just as there's no simple answer to questions about how to pay for a much-needed increase in the JobSeeker or anything else.
The deeply unsatisfying answer is that, from an economic perspective, it depends on who else is spending what at the time.
- Peter Martin is a former economics editor of The Canberra Times. This article was first published in The Conversation.
Peter Martin
Peter Martin is the business and economy editor of the Conversation and a visiting fellow at the Crawford School of Public Policy at the Australian National University. He is a former economics editor of The Canberra Times.
Peter Martin is the business and economy editor of the Conversation and a visiting fellow at the Crawford School of Public Policy at the Australian National University. He is a former economics editor of The Canberra Times.
