Monday, 19 May 2014

Ross Gittins is wrong

The redoubtable Ross Gittins is incorrect on two fronts.

On the first front he believes the budget is CONTRACTIONARY.  however he has not looked at the RBA Statement on monetary policy  in enough depth.
They were clearly expecting  fiscal policy to ADD around 0.4-5 percentage points to GDP in the incoming fiscal year. This appears to be on the money.

A contractionary budget detracts from GDP growth. To put it another way all Mr Hockey is doing is taking his foot off the accelerator somewhat after he put it down quite a bit on getting into office. He most definitely has not put his foot on the brakes as yet! Hence the budget is merely less expansionary than the current one which he manipulated.

On the second front he , like others such as Chris Richardson et al , keeps on saying this budget is not as strict as the one in 1996 nor in 1987.
However he ignores Wayne Swan's last budget. He actually cut NOMINAL spending. This budget led the public sector detracting 0.7 percentage points from GDP. Although clearly the most austere budget since Budget papers have been released this budget was one of the reasons we got the LOWEST Nominal GDP growth we have ever seen! (Peter Costello was a wimp by comparison. He could not cut spending at all in real terms!)
In other words it was not the optimal fiscal strategy.

What is the most optimal fiscal strategy? Getting back to trend nominal GDP growth. If we get there then we do not have a deficit at all!! Fancy that.

Postscript
EVERY Costello budget added to demand. People who have the simplistic idea that surpluses detract from GDP and Deficits add to demand simply do not understand basic fiscal policy.