Tuesday, 20 August 2013

A strong caveat on it doesn't matter who wins

I have said previously It matter who wins the election as they will have to put very similar policies in practice anyway.
Just on the political front, in particular economics see John Quiggin and Ricardian Ambivalence. They view things differently of course and favour the ALP and the Coalition respectively to win when push comes to shove.

However last night I was reminded by a friend of a possible scenario which would involve something different to the above.
To outline this we must go back to the last years of the previous Government. Without a GFC to distort revenue flows the Government could only have surpluses. However Peter Boxall, then Head of Finance, came up with a variation of the classical theory in economics. He said the Government should merely aim to regularly have the surplus at 2% of GDP. Ken Henry and most at the RBA argued against this saying if you merely kept to that target it meant a de facto easing in fiscal policy.
Howard and Costello were assured this was the best policy to follow. We then got to an overheated economy because easing fiscal policy when there is no output gap will naturally lead to inflation.
Even when this was occurring the Government was told by Costello the RBA would not raise rates in an election year.Ken Henry believed Glen Stevens would act no matter whether there was an election or not . Anybody who knows Glen would have known that and he even said so in Parliamentary testimony. So it is amazing the Coalition was taken so much by surprise when the RBA did raise rates during the 2007 election campaign. John Howard is still very bitter about this decision despite being told by Ken Henry this was likely when the budget was being drawn up.

Now imagine a coalition victory but a bloodbath amongst the public service alah John Howard 1996.  Let us say Peter Boxall or some-one similar is appointed to head of Treasury.
What if we see austerity measures introduced now. By that I mean the public sector detracts substantially from growth in a significant way. This  article then becomes very interesting reading.

Austerity measures introduced when nominal GDP is well below trend and expected to remain there for some time is highly likely to exacerbate the domestic slowdown perhaps even bring on a recession  UNLESS lower interest rates and a lower exchange can offset fiscal contraction. World economic growth might even recover to assist as well.

HOWEVER these are all simply hopeful outcomes. None of them appear to have any legs at present.
Adopting austerity when all three are occurring is very sensible. Adopting them when very few if any are occurring is simply ignoring the European experience.

It remains to be seen what will occur.