Monday, 10 June 2013

What is a fiscal conservative?

A question to ask going into this election year is what is a fiscal conservative.

The very easy answer is a fiscal conservative attempts to keep the budget in balance over the course of the business cycle. however this can be circumvented.

Thus we need to examine whether a Government has needlessly increased the structural side of the budget.

We examined the the-structural-balance-of-budget not long ago.
We found the deterioration started around 2002/3 and only started to improve after 20011/12.

The  main drivers were the cuts in personal income tax with the resulting increase in company tax to offset this and the abolition of the petroleum excise indexation.

If we combine both the look at the overall budget as well as examining the structural balance of the budget we would then find neither the Governments led by John Howard nor those led by Kevin Rudd or Julia Gillard were fiscally conservative.
However the ALP governments do have a reasonable excuse of waiting until the recovery is quite certain until attacking the structural deterioration. This is occurring now but at a slower pace given the problems of below trend GDP.

We really cannot comment on what the opposition might do because they have been quite deliberately ambiguous on this issue.

So in the end a fiscal conservative will attempt to keep the structural balance correct over the cycle. A strong structural surplus is needed if a commodity boom is lifting nominal GDP to record highs. A temporary  deficit is needed if a country is threatened with a GFC and monetary policy is impaired.

Most of the time the structural side of the budget should be balanced leaving the automatic stabilisers to change the budget from going from surplus to deficit and vica versa.