Monday, 19 November 2012

Fiscal Policy

Let us examine fiscal policy again.

Just to be helpful this is what CBA research has come up with.

                                                              12/13  13/14   14/15
                                                                 $b       $b        $b

Budget balance at May budget          1.5      2.0        5.3
changed economic parameters            -1.9    -5.0      -3.9
implied starting point                            -0.4    -3.0       1.4
policy decisions                                      1.4     5.1       1.9
budget balance                                        1.1     2.2       3.3  

So the major problem has been economic parameters changing for the worse. In this we know what it is. Taxation revenues being much lower than one would expect. The government has made policy decisions which have meant the budget would be balanced.
This means fiscal policy has been contractionary for some time now. In other words it is detracting from GDP growth.
The public sector is making way for the private sector as Keynes said they should at this stage.
Moreover it is not detracting too much from economic activity as to produce a slowdown.

It is highly noticeable that most critics of fiscal policy never address this potential problem. Implied in their criticism is that fiscal policy should be much tighter. In some cases very much tighter.

It is not in the nation's interest to create either a slowdown or a recession.

At present cash rates are 3.25% and it appears the RBA is wary of letting them go below 3%. The $A has not fallen to levels one should expect given where commodity prices are.

The world economy is a different place to one would normally expect so tighter fiscal policy other than what has been announced does not seem appropriate at present.

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