Ian M. McDonald*

National Australia Bank

Professor of Economics

The University of Melbourne

* I thank Peter Stemp for comments on an earlier version
 
 

In the Commonwealth Government Budget for 1995-96, announced in the Budget Speech on 9 May, 1995, the Treasurer, Mr Willis, forecast a government budget surplus of $0.7 billion for 1995-96. This is a turnaround of $12.9 billion on the expected outcome of a government budget deficit of $12.21 billion for 1994-95. Of this change to budget surplus from budget deficit, $5.4 billion represents sales of government assets projected for 1995-96. These sales include the sale of QANTAS, the sale of part of the Commonwealth Bank and the sale of Commonwealth cars. The latter will be leased back by the Government. By being included in the government budget these assets sales may be interpreted by some as representing a discretionary, budgetary tightening of $6.4 billion. This interpretation is false. In fact, as shown below, the rnacroeconomic impact of the sale of a government asset to the private sector is similar to the macroeconomic impact of the sale of a Commonwealth Government Security by, the Reserve Bank of Australia to the private sector.

A discretionary tightening of budgetary policy will reduce the level of aggregate demand. This reduction results either from a reduction in government expenditure, which is a component if aggregate demand, or from an increase in tax rates. The latter will reduce the disposable income of individuals and institutions in the private sector which will lead, in turn, to a reduction in planned levels of expenditure by individuals and institutions in the private sector.

The sale by the Government. of an asset such as a sale of a share in QANTAS is not government expenditure nor will it affect people’s disposable incomes. It is not a tax. Because of this, to include asset sales in the measure of the government budget deficit reduces the accuracy of that measure as a guide to discretionary changes in budgetary policy. (Of course the fact that the aggregate level of activity affects the actual outcome of the government budget deficit also reduces the accuracy of the government budget outcome as a guide to discretionary changes in budgetary policy. To adjust for this effect, one uses a structural or full-employment or cyclically-adjusted measure of the government budget deficit to make judgements about the nature and size of discretionary changes in budgetary policy.)

Asset sales have similar macroeconomic impacts to open market sales by the Reserve Bank of Australia of Commonwealth Government Securities. When the Reserve Bank of Australia sells a Commonwealth Government Security, it trades a financial asset, that is a piece of paper which gives the owner the right to payments in the future, for a payment of cash. The effect of such a sale is to put upward pressure on interest rates. The sale withdraws cash from the monetary system thereby causing short term interest rates to rise. Furthermore the sale increases the stock of Commonwealth Government Securities to be held by the public. To induce the public to hold the enlarged stock of Commonwealth Government Securities it is necessary that they be rewarded with a higher interest rate.

The sale of a share in QANTAS is also a trade of a financial asset, a piece of paper which, in this case, gives the owner the right to a share of profits earned by QANTAS ‘In the future (and also the right to influence the running of QANTAS) for a payment of cash. So the sale of this share, by withdrawing cash from the monetary system, puts upward pressure on short-term interest rates. The sale will also put downward pressure on the price of shares in general, eg. on the share price index, because a lower share price will increase the rate of return earned on shares, and thereby induce the Public to hold the enlarged stock of shares. Finally, the lower price of shares will lower the price of Commonwealth Government Securities, thereby raising the interest rate on Commonwealth Government Securities. This link between the price of shares and the price of Commonwealth Government .Securities occurs because shares and Commonwealth Government Securities are substitutes, that is alternative ways of holding wealth, and , so their rates of return move together. Thus just as an open market sale can be expected to put downward pressure on share prices so will the ,,ale of a QANTAS share by the Government put downward pressure on the prices of Commonwealth Government Securities.

The similarity of government asset sales with Reserve Bank of Australia sales of Commonwealth Government Securities suggests that government asset sales will have a similar effect to the tightening of monetary policy in that they will tend to raise interest rates. If the Reserve Bank of Australia wishes interest rates to be unaffected by asset sales in 1995-96 it will sell less Commonwealth Government Securities. or buy more Commonwealth Government Securities, during that year than it otherwise would. Although QANTAS shares and Commonwealth Government Securities are riot perfect substitutes, their closeness from the viewpoint of the wealth holders suggests that Commonwealth Government Securities sales in 1995-96 will be of the order of $5.4 billion less because of the projected asset sales by government.

A place more appropriate to record government asset sales than in the government budget would be in a balance sheet of the stocks of government assets and liabilities, such as the amount., of CGS held by the public and the physical assets such as school buildings, hospitals and. if the government owns any, passenger aircraft.