Sunday, 24 January 2016

A short lesson in fiscal policy for Catallaxy clowns

Yes, I am a bit bored but  Sinkers  has an article on fiscal policy which are mindblowingly  poor and of course inaccurate.

Sinkers says that because Costello in his first budget reduced Government spending from 25.1% to 23.9% of GDP it is easy to cut spending.

A couple of things before we start. Sinkers was amongst the cheerleaders when the same man cut income taxes and got rid of the excise duty on petrol despite being told by people more knowledgeable that without commensurable spending cuts all this would do would be to create a structural budget problem. It is noteworthy that Sinkers has never acknowledged this nor even understood this!

We have examined the structural budget deficit previously and found both Treasury and the PBO both agree that it was largely due to these two measures. Indeed any problems due to spending has been overcome .

Now let us come back to the figures Sinkers gave us. They are accurate BUT a ratio can fall due to either the denominator or the numerator.

So let us look in a bit more detail at Costello's figures and compare them with what Swan did in the last budget he had responsibility for.

Spending actually increased in real terms when using the CPI  but it did fall using the more broader non farm gross domestic product deflator. There is a difference of 1.3 %

Now let us go to Swan's budget.
The ratio fell from 24.9 to 24.1% of GDP. Not very impressive eh!

 However Spending fell in NOMINAL terms. It fell in real terms 0.7%  ( the same as Costello) when using the deflator but a whopping 3.2% when using the CPI. This huge range gives us a hint of what occurred. Swan has the experience of a terms of trade shock. Hence the broad deflator went into deflation. No Stagflation to see although!!

Swan's budget cut 0.7 percentage points off GDP the largest ever recorded in budget history. Costello's added to GDP albeit less than the average to that date.

Let us assume that Sinkers doesn't just want to reduce the structural budget deficit  at present ( let us call it 2% of GDP however it is a movable feast because of assumptions and further let us assume because he is very hairychested he wants a structural budget surplus of 1% of GDP.)

I think I am being very conservative in thinking such a budget would cut something like 2 whole percentage points off GDP

Glenn Stevens has said that monetary policy would not give a lot of oomph cutting rates from 2% towards zero so you wouldn't get very much monetary off-set.

Ipsofacto what you would get is a recession!

Of and by the way if you want to examine the impact of commodity prices on the budget look at company taxes not at levels of  commodity prices!!

So what we have here is a man who doesn't understand the basics of ratios, budget papers or fiscal policy.!