Monday, 19 December 2016


MYEFO was released yesterday by the Government.

Both Greg Jericho and the Kouk have commented on it. As has John Edwards

I have a few thoughts on seeing it. Why has spending increased since the change of Government?  Whilst I doubt if the government has increased the structural deficit I doubt if it has decreased it since it gained office.

Too much can be made of this. We do know fiscal policy is powerful, possibly more powerful than monetary policy. Evidence since the GFC has made this abundantly clear. Indeed We have Wayne Swan's last budget to show for this here.

Thus any attempt to reduce the structural deficit in a significant way  whilst the economy is not strong is bound to be a negative to the economy as Wayne Swan found out. He also found out lower interest rates simply does not cut the mustard and thus is not an offset.
You need to target the Structural deficit with nominal GDP. As nominal GDP reaches its trend then you reduce the structural deficit.
A government which made it a policy to get back to trend nominal GDP and was successful would find the budget in balance a quite easy task.

The other thing people like to talk about are the ratings agencies and whether they will downgrade Australian government debt. One thing people need to realise here is that it is how is Australia is going RELATIVE to other Countries on a AAA rating.
If Australia was downgraded but Canada and Holland was not then it would be ludicrous.

I should have emphasised two three  things.
1) Firstly expenditure is way higher than what the Liberals inherited. It is either a weaker economy or deliberate spending ( i.e. a higher structural deficit).
2) The economy is the main game in town not the budget. When the economy gets back to normal conditions the budget will be in balance. This is because the cyclical factors outweigh the structural factors. It is very easy to cut then indeed it is beneficial.
3) the actual numbers are not the important ones they will go up it is the ratio to GDP that is important and they are declining ,not as much as previously 'projected' but still declining.