Tuesday, 30 April 2013

The Budget Again

The PM a few days ago announced that revenue would not even reach the levels predicted in the last MYEFO.
Let us now examine the most important economic parameter with regard to the budget

It is of course Nominal GDP growth. It was forecast to be 5.1 % in the budget. It was revised down to 4.2% in MYEFO and now CBA economic research expects it to be 3%. ( the figure for Real GDP are 3.5%,3% and 2.9% respectively.  ( Just as a matter of interest the forecasts for NZ for Nominal GDP are 3.6 and 5.9%. If that was to occur in Australia the budget bottom line would be in the black!!)

The budget will DETRACT about 0.75 % points from GDP this financial year. (Note how this is completely incompatible with the view the problem is all about excessive spending.)
Also cash rates are 3% and falling. Notice how compatible this is as well. 

If the government cut expenditures like some fiscal ignorami are demanding then this figure would be more. at least 1% on my back of envelope calculations and that is being very conservative.
This of course would make nominal GDP even weaker and therefore the budget deficit even larger!.

CBA are forecasting a deficit or around 0.7% of GDP which is a balanced budget. Ricardo Ambivalence thinks it could be over 1%.

The point is you do not undertake greater fiscal consolidation when the Nominal GDP is so weak. You wait until it is much stronger.

Greg Jericho of Grog's Gamut fame has a reasonable article on the budget. He however does not emphasise the role of Nominal GDP enough.