Tuesday, 26 February 2013

Fiscal policy in the future

In Australia we have the budget delivered in May. This is the Government of the day's fiscal statement for the fiscal year ( July to June).

As we have discussed in recent days fiscal policy is a means to an end. At present it is contractionary or the government is pursuing austerity.

As we have seen pursuing austerity in a boom as Keynes pointed out in 1937 makes perfect sense but it doesn't make sense when nominal GDP is below trend and continuing to fall.

Does this mean the Government should start spending again?  No. Even though things are not normal yet ( the revenue figures tell us that) we can for the moment rely on automatic stabilisers and  looser monetary policy.
The only thing policymakers can't control is the continuing high level of the $A.

As things get back to 'normal' then the budget will get back into balance.

The politics of such a policy is different but that is because
1) The Government can't explain its fiscal policy
2) The Opposition doesn't understand its policy position. ( This assumes they are telling us their actual policy position.) I will write about this closer to the election.