Sunday, 24 February 2013

The GFC, A Counter-Factual

We know now if not for the Government's actions Australia would have experienced a recession following the GFC.
It must be said this only occurred after Ken Henry and Glen Stevens literally pounded the need for government action into Wayne Swan's head.

However what if the coalition had won in 2007. What would have they done?

I think we can assume they might have done one of three things.

1) They could have done nothing. Insisting they had a tight budget and the need to maintain a budget surplus.
However we could assume the structural deficit would have been larger and then  made artificially larger once the GFC hit revenues. Automatic stabilisers would have also hit the bottom line evaporating the surplus before our eyes. On this scenario unemployment would have rocketed up past 8% perhaps even hitting 10% before levelling out.
I rate this only a 20% probability

2) They could have reacted to the GFC like New Zealand , Canada or Sweden. However this would have occurred after the event so even on this scenario unemployment would have risen to around  at least 8%.
If tax cuts would have been the major area of policy then this would have made the deficit worse than under the stimulus. The reason of course tax cuts have a constant effect on revenues whereas a stimulus has only a short effect on spending patterns as we have seen.
I rate this a 80% probability

3) They could have attempted to maintain a budget surplus. Cutting spending and raising taxation.
This of course would have probably made a depression (a fall in GDP of over 10%) inevitable.
Unemployment would have risen to at least 15% and the deficit and debt ratios would have blown out enormously like Ireland or Estonia. ( see this for example) I rate this a nil % probability.

Over the next couple of days we will examine what fiscal policy is at present and what it should be over the next couple of years.