Wednesday, 22 July 2015

Glenn Stevens casts doubt on trend growth

Glenn Stevens who is the Governor of the Reserve Bank of Australia made a speech yesterday.

In it he talked about whether the trend rate of growth has declined lately. It may have declined for the 3.25% most people (and the budget assumed) thought.

This does have implications for fiscal policy. It does mean that when the economy gets back to its trend level the budget will not gain the revenue you would normally expect and thus the budget would not automatically balance..

This means there must be either cuts to expenditure and/or a rise in taxes to enable the budget to balance ONCE the economy is back at trend growth.

To do that now when the economy is weak is to repeat the mistake Wayne Swan did when he cut 0.7 percentage points from GDP. Easily the most austere budget since budget figures were collected.

Thus any Government ( or Opposition needs both a short-term fiscal policy together with a medium term policy.
In the immediate term we need to get back to trend growth. In the  medium term we need fiscal consolidation.