The federal budget is nothing like a business, nor does it resemble your personal accounts. Our politicians and so many commentators just don’t understand how modern government finance works. David Tyler explains.
The great tragedy of Australian politics isn’t that David Littleproud doesn’t understand how modern government finance works. It’s that he’s got plenty of company – a whole parliament of them, from Labor’s frontbench to the crossbench’s policy wonks, all clutching the same fossilised misconception like it’s the tablets down from Sinai.
They recite “balancing the books” like it’s a prayer, not realising they’re worshipping an idol carved from their own ignorance and buffed to a shine by fifty years of repetition.
So, for Littleproud and the entire parliament of earnest amateur accountants, here is Modern Momentary Theory (MMT) explained with the bluntness the moment demands.
The Commonwealth is NOT a business
Nor is it a farm, a household, a footie club or your strata committee. Yet Littleproud loves standing in machinery sheds lecturing the nation to tighten its belt.
But scan the benches; Labor ministers mouthing the same pieties, state premiers virtue-signalling fiscal rectitude, Greens senators trying to sound responsible about “the bottom line.” Even some coastal council treasurers between Kiama and Kalamunda are probably telling ratepayers right now that “we can’t afford” to fix the sea wall.
They all repeat the same nursery rhyme: “The government must live within its means.”
Except the Commonwealth is the issuer of the currency. It doesn’t “live” within anything. It creates the dollars the rest of us must live within.
Insisting the Commonwealth could “run out of dollars” is like insisting Woolworths could run out of barcodes.
“Taxpayer money” is political ventriloquism
Whenever a politician wants to stop public investment, they intone: “Taxpayers’ money!”
It’s bipartisan. Albo says it. Littleproud howls it. State treasurers shriek it at budget time like cockatoos fighting over a chip.
But the truth is simple: Government spends first, taxes later.
Taxes don’t fund spending; they free up real resources, give the currency value, and shape behaviour.
The idea that Canberra keeps a giant jam jar labelled “Taxpayer Money” is a delusion shared across the entire political spectrum – treasured equally by those who want to spend nothing and those who want to spend a bit more but apologetically. It would be charming if it weren’t deployed to justify neglecting hospitals, climate infrastructure, housing, and the entire notion of a public realm worth defending.
The 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 drive demand for the currency. Why does anyone accept Australian dollars? Because the government demands tax payments in Australian dollars. That creates baseline demand for the currency and gives it value. Without that tax obligation, the currency would be worthless paper.
Second, taxes regulate aggregate demand. This is the inflation control mechanism politicians completely misunderstand. When the economy is running hot and inflation threatens, raising taxes withdraws spending power from the private sector, cooling demand without destroying productive capacity.
Third, taxes redistribute wealth and income. This is the function politicians are most desperate to avoid discussing, because it reveals that
tax policy is always about who has power and who doesn’t.
Progressive taxation, where higher incomes pay higher rates, can counteract the tendency of market economies to concentrate wealth. Capital gains taxes can slow the transformation of income into dynastic wealth. Wealth taxes can prevent the emergence of oligarchy.
But regressive taxation, GST, flat taxes, payroll taxes that hit wages harder than capital, accelerates inequality. It extracts resources from those with little – (most of us) – and protects fat cats; those with much.
Australian tax policy over the past forty years has been a masterclass in using taxation to redistribute wealth upward. Negative gearing. Capital gains tax discounts. Superannuation tax concessions that benefit the wealthy far more than workers. Franking credit refunds that hand billions to those who need it least. Capital has flooded from the poor to the rich.
These aren’t accidents. They’re choices. And they’re choices that become invisible when politicians pretend taxes fund spending rather than shape distribution.
When Littleproud or Chalmers or Taylor talk about “taxpayer money,” they’re hiding the real question: whose money gets taken, and whose money gets protected? MMT makes that question unavoidable.
Finally, taxes modify behaviour. Cigarette taxes discourage smoking. Carbon taxes (if we ever get serious ones) discourage emissions. Land value taxes discourage speculation. Taxes on sugar, on pollution, on activities we want less of, these are tools for shaping economic activity toward public benefit.
The “taxpayer money” myth obscures all of this. It treats taxation as mere revenue collection, when it’s actually a sophisticated set of policy tools for managing demand, distributing resources, and steering behaviour.
Politicians love the myth because it lets them avoid hard conversations about distribution. Much easier to say “we can’t afford it” than “we’ve chosen to protect wealth concentration rather than fund public housing.” It is all about choices.
Budget surplus is economic vandalism
Nearly every Australian government, Commonwealth, State, Territory, even the occasional shire council with delusions of grandeur, loves boasting about surpluses. (But you can be too eager. Just recall Josh Frydenberg’s back in black fiasco.)
A surplus just means the government extracted more from the economy than it returned.
When politicians of every colour brag about “budget repair,” what they mean is: “Look at how responsibly we drained your bank accounts.” It starves services. It shrinks private savings. It drags on growth.
Government “debt” is the safest asset
This myth is shared by Labor MPs trying to look grown-up, Liberals cosplaying as accountants, Nationals hoping to sound tough, and
State treasurers who think they’re Robert Menzies. Media commentators, too, use “gross debt” the way preachers used “original sin”.
Government bonds are not borrowed from China or Martians. They’re liabilities of the same entity that issues the currency. They’re a bookkeeping device and a stable savings vehicle.
The idea that the Commonwealth could “run out of money” is the single most widespread, bipartisan, cross-jurisdictional hallucination in the nation.
Government spending does not cause inflation
Every politician pretends inflation is caused by “waste,” “overspending,” or “Labor building too many things.” (Unless they’re in office, in which case it’s “global.”)
MMT treats inflation as the grown-up constraint it is: a mismatch between spending and real capacity.
If we lack nurses, carpenters, transmission lines or housing stock, prices rise. That’s a resource problem, not a moral failing.
The solution isn’t austerity theatre. It’s building capacity – training people, expanding infrastructure, and mobilising idle resources. But that requires admitting the Commonwealth has the financial capacity to do so, which punctures the whole “we can’t afford it” pantomime.
Government spending isn’t inherently inflationary. If there’s unused capacity – unemployed workers, idle factories, underutilised infrastructure – government spending mobilises that capacity without triggering inflation. It’s only when spending pushes beyond available resources that prices rise.
Here’s where MMT differs fundamentally from the fairy tale politicians tell. The constraint on government spending isn’t some fictional budget limit. It’s real resources: labour, materials, productive capacity, technology, time.
Inflation happens when spending (public plus private) exceeds the economy’s capacity to produce real goods and services.
When demand outstrips supply, prices rise.
That’s inflation.
During COVID, when economies shut down and supply chains fractured, massive government spending did contribute to inflation because productive capacity had been deliberately constrained. The spending wasn’t the problem – the broken supply chains and workforce disruptions were.
Also, private sector spending can be just as inflationary as public spending. When banks create credit for property speculation, bidding up house prices without creating new housing, that’s inflation. When corporations engage in price gouging during supply disruptions (as we saw in 2022-23), that’s inflation.
But politicians only ever talk about government spending causing inflation, because acknowledging private sector contributions would require regulating capital. Moreover, politicians treat all spending as identical because they’re trapped in the household budget myth.
David Littleproud isn’t uniquely wrong; he’s just the bloke in the Akubra version of a delusion that runs from Kirribilli to Parliament House to every state treasury in the land. The bipartisan faith that the Commonwealth Budget is a household ledger instead of the operating system of monetary sovereignty.
Money isn’t scarce. Economic literacy and political imagination are.