Thursday, 20 December 2012

Fiscal Policy again

Well at last Wayne Swan has bowed to reality.
As I have mentioned almost ad finitum given we have had below trend nominal GDP growth for some time and it is nominal GDP that is all important to the budget bottom line we were never going to get a balanced budget ( for that is what you have if the bottom line is less than 1% of GDP.)

In no particular order the reasons why we should not have a balanced budget are:
  • It isn't possible. If you try to cut spending to overcome automatic stabilisers you will increase the deficit not reduce it as we see in Europe
  • Fiscal policy is not an end it is a means. It is there to boost GDP growth and reduce unemployment not the opposite
  • Austerity works in good times as Keynes pointed out in 1936 not in times when the economy is slowing
  • Fiscal policy is quite potent but monetary policy is not is some circumstances. This means lower interest rates may not offset tighter fiscal policy even if the RBA is not behind the curve.
  • It may lead to the $A depreciating and going to levels reflecting its fundamentals
  • Even the OECD and IMF have said so

Wayne Swan has shown again he takes a long time to change his mind. After browbeating by the Treasury Secretary and RBA Governor he eventually agreed to use fiscal stimulus to overcome the GFC, thank the Lord.
Now he has been eventually convinced he couldn't get a surplus. Why did it take so long?
Why is he such a hopeless politician. On this see Mumble ( second last on the sidebar.)

I should add AGAIN that when anyone claims the budget should be in substantial surplus then you know they are fiscal incompetents.

Compare the last three years of the last government with the last three years of this government in terms of budgets. One thing stands out like a saw thumb.

Revenue is a lot weaker this time round than last. Check out Mark the Graph


If it was easy to balance the budget then Hockey would promise to do that. He hasn't.!

Compare and contrast:
John Quiggin
Nick Gruen
Sinclair Davidson

Okay I think Nick's is easily the best around the traps