Wednesday, 28 January 2015

Fiscal Consolidation

I notice Judith Sloan got her knickers in a knot about when does a country undertake fiscal consolidation.
The answer is pretty easy. fiscal consolidation or austerity should be undertaken when times are good just as Keynes said way back in 1936.

The last time Sloan wrote about this topic The Kouk showed her figures were all contrary to those in the budget papers. I then looked at all Labor budgets but couldn't find in any Budget or MYEFO where Sloan could have got her figures from. We can be thankful she hasn't done that here! We should also note she never told us where she got those figures from.

I have to say there isn't a lot more one needs to add to this piece from the Kouk.

One might also add this from Simon  Wren-Lewis on Europe.

If a country under-takes fiscal consolidation too soon it risks destroying any recovery. We saw this in the USA in 1937 , in Japan in 1990s and even here when Wayne Swan brought down the most restrictive budget in history. Swam actually cut NOMINAL not just real spending.
Unfortunately for him and Australia with nominal GDP weak from the falling terms of trade it simply made the economy weaker and hence the budgetary situation got worse after getting better. The Deficit which fell from 2.9% of GDP to 1.2% of GDP consequently rose over 1% of GDP.  Even with low wage growth and stalling revenues we have a deficit of 2.5% of GDP! wow.

When you undertake fiscal consolidation you reduce the structural deficit. This impacts on the cyclical part of the budget which is far larger. Thus if you undertake austerity too soon then the economy will weaken.
Fiscal policy is quite potent. You fiddle with it at your peril!

Update
Alas the peroxide princess believes national budgets are just like household budgets.
Some people are just like the Bourbons. Never learn, Keep on making the same mistakes.