It's only inflationary if you pay them Australian dollars

As part of its budget cuts, the Department of Foreign Affairs and Trade is scaling back several overseas posts. As the SMH reports it.

During the Senate hearings, Mr Chester revealed the department had withdrawn five more diplomatic positions since the May budget, the result of a requirement to cut a further $4.4 million from DFAT spending in 2008-09.

In January, the government announced it would cut $52 million from DFAT’s budget over three-and-a-half years, part of spending cuts across the whole of government.

The $52 million included a savings of $17 million in 2008-09.

Mr Chester said that as a result of the budget there was an additional $4.4 million worth of savings the department had to make in 2008-09.

“They will be the withdrawal of a small number of positions overseas and a reduction in total A-based (Australian-based) staffing of nine,” he said.

“And we’ll have an additional efficiency dividend across the operating budgets of all work units.”

The overseas staff will come from missions in Belgrade, Ho Chi Minh City, Phnom Penh, Port Louis and Kuala Lumpur.

As far as I understand it, the rationale for most of the budget cuts has been that the government does not want to place upwards pressure on inflation. But I wouldn’t have thought this applied to diplomats, who spend most of their salary in another country. Indeed, bringing them home could conceivably have an inflationary impact, since they will now spend their money in Canberra instead of abroad. Surely the current context (healthy budget, inflationary pressures) is a natural time to be expanding our diplomatic presence, not reducing it.

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4 Responses to It's only inflationary if you pay them Australian dollars

  1. Jono says:

    I don’t think that they spend most of their 6 figure salary abroad ?

    By admitting that they would spend money when they came back home, we can see that its a type of deferred inflationary liability that previously existed seeing as you can’t keep diplomats abroad forever.

    But by my reckoning, if Australian dollars are sent abroad, those dollars act as a future claim on Australian goods and services. Australian dollars will eventually return back to our shores and have the same impact as being spent locally.

    I have the same opinion with regards to the inflationary impact of government vs private spending. Why is one more inflationary than the other ??

    The government of the day always seems to avoid large tax cuts and they maintain government spending at its current levels to “avoid inflationary pressure”, but I think their real motivation is to hold onto as much revenue as possible without giving back a cent.

  2. Kevin Cox says:

    Inflation is not caused by price increases it is caused because there is too much money printed or issued for the goods available – it is simple as that. You can stop inflation overnight by stopping printing money (giving loans). This can be done without stopping the economy in its tracks if you issue money selectively in the parts of the economy.

  3. Jono says:

    I agree Kevin..

    I just didn’t think there was anybody in Australia at the moment who would notice the elephant in the room. Most people think CPI is the perfect definition of inflation, but not only does it understate it, it misrepresents it entirely.

    Inflation should be seen as a monetary phenomena. When you inflate the supply of dollars and keep the supply of goods and services the same, of course the price of those goods and services are going to rise. So the media should be looking at monetary aggregates to track inflation.

    The Reserve Bank of Australia has to stop its practice of credit expansion via fractional reserve and bring back some soundness to our currency.

  4. cba says:

    “This can be done without stopping the economy in its tracks if you issue money selectively in the parts of the economy.”

    welcome to command and control…

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