Wednesday, 24 August 2016

Getting the budget back to balance

We have a lot of hoo ha ( a technical term) from both parties of how to get the budget back to balance.
ONE problem we are being mightily misled.As Ross Gittins points out the government is covering its recurrent expenses. The reason the budget is in deficit is infrastructure spending.

Now a concerted attempt to get the budget back to balance when it is currently estimated to be 2.2% of GDP has three problems.

The first problem is the contractionary effects it would have on the economy.  I have written about this recently here and here. I suspect that is why all treasurers have been very tentative in their budget consolidation efforts.

The second problem is that infrastructure spending would normally boost the supply side of the economy as Glenn Stevens alludes to in his last speech.  See here for an old paper on how this occurs from the US Treasury.

The third problem is you are cutting programs not associated with the structural problems of the budget. The problems of the structural deficit are all on the revenue side. ( see first here link for that.)

Unfortunately we have politicians on both sides who either do not know what they are talking about or are simply talking porkies.
It is unlikely we will in the foreseeable future so budget repair must be slow but sure otherwise it will be counterproductive. see booming conditions.

update:

I have been asked if the government and opposition are fair dinkum in their efforts at budget repair.

No as I implied neither side is. If the Government was they would have had a meeting with Shorten, Bowen and Chalmers and come to an agreement on what to do instead we first of all had Turnbull saying by megaphone he wanted an agreement with the ALP/ He wasn't serious and we have seen this ever since Turnbull's speech. The government minsters have been politiking and it was easy to spot. ( Thus it was poor politi. king alah Abbott)  The Oppostion then responded  in kind . Our political classes are not of a high order