Tuesday, 18 December 2012

The Budget and all that

Ross Gittins writes about the budget and the economy and he makes a lot of sense.

I only support putting the budget into the black if they do it via smoke and mirrors. After-all fiscal policy is if anything too contractionary. Only a very silly person would make it even more contractionary particularly when cash rates are at 3%!

When nominal GDP is below trend as it has been for some time then the budget will not be balanced.

Without smoke and mirrors fiscal policy can only become more contractionary by attempting to balance the budget. This means weakening the economy and wella the budget blows out. We see this happening in Europe.
(The Irish economy is still below what it was before the GFC!)
Such measures if anything would lead to $A appreciation which is contractionary as well.

Monetary policy just wouldn't offset this just as it isn't at present.

Update

Wayne Swan at a press conference has bowed to reality. He will not try and obviate automatic stabilisers.

He was quite good at the press conference as well.