Wednesday, 4 March 2015

Fiscal Idiots

Our old mate Sinclair Davidson has an absurd piece on fiscal policy.
Why is it absurd?
The ABS produced the latest National Accounts yesterday. Real GDP was stronger than Nominal GDP both for the quarter  and the year. The reason being the nation as a whole experienced deflation. 

Stagflation still nowhere to be seen.

Imagine this trend continued for whatever reason until 2020. What chance would there be of gaining a budget surplus. Two , Yours and Buckleys.

Now on the other hand imagine that Nominal GDP grows around 6% a year until 2020. The budget surplus would miraculously appear despite little work on either spending or taxes.

Here we observe the problem of people who claim to be of the classical school.The budget is a means to an end not an end in itself.
 As we have observed in Australia Costello produced a budget surpluses yet some of them were expansionary. Swan produced a budget deficit yet it was the most contractionary in the history of budget data!

Simon Wren-Lewis writes on both the theory and the evidence.