Missed opportunity

A fair criticism of how I have framed my discussion of the budget is that the objective of fiscal policy in not to stabilize nominal interest rates. I totally agree. The reason I framed the discussion in these terms was because I anticipated that the Government would attempt to put this spin on a weak budget that did no such thing. I think I was right in this assessment.

The appropriate objective of fiscal policy is to increase economic welfare. It does this by taxing money or borrowing money – and either investing, spending it directly, or transferring it to others to invest /spend.

The federal government does little direct investment – that is mostly done by the states – and what it has done has typically been done poorly (pink bats, anyone?), so I am going to leave the direct investment part of the budget alone.

That leaves the appropriate question as to if we are spending the right amount, and given the various costs of tax and debt finance (which may or may not be equivalent).

There are two ways of answering this question – and I don’t have time for the superior line by line method, so for this post I am going for the top down approach.

What should a prudent person do with a windfall gain? They should spend a bit of it and save most of it – and that is exactly what the government should do. So when you have a once in 150yr terms of trade boom, expenditure as a proportion of GDP ought to fall.

Yet, what is happening is this — at the peak of the boom, following the best three years of nominal revenue growth in the low inflation period, government spending as a proportion of GDP falls to 23.9% of GDP … About the average of the last 15yrs, and about 1ppt higher than in 2007/8, before the GFC ‘stimulus’ began.

The so called spending restraint does produce historically weak government spending growth — real growth is 0.5% in 11/12, and -0.1% in 12/13 — but this is following historically strong expenditure growth during the GFC.

Things brings us to the second point that can be usefully made within the confines of this top down approach — that aggressive stabilization policy by the fiscal authority requires a period of ‘loading up’ prior to the crisis, so they there is some ammo to unload when the big grizzly bear arrives.

What better time to reload than in a full employment economy, enjoying the highest terms of trade and biggest mining investment boom in 150yrs, accompanied by the strongest revenue growth in the modern period? I think this is the best possible time.

Apart from all this economic stuff, it also would have been good politics — the government has backed down from too many fights, and lacks authority as a result. They need to pick a fight and win it. Winning a tough decision, and potentially earning the upside of a delayed rate hike might have given their awful polling a boost.

Thus, I conclude that this is a lost opportunity for all of us!

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2 Responses to Missed opportunity

  1. Alister says:

    Writing “pink bats anyone” in reference to government direct expenditure is lazy. Possum reckons it wasn’t so bad, as does the CSIRO. You might just as easily made your point about what the government’s actions should be by way of supporting the MRRT, which would have the added advantage of increasing public income on the area that’s generating significant private income.

  2. Alister says:

    … “which is why Govt is inferior to the private sector at doing just about everything”.
    I think this is a cheap shot too. The private sector’s notably bad at hospitals and health generally, along with primary to tertiary education. I think it’s a matter of horses for courses – the public sector has different aims and objectives to private firms, but on those (rare) occasions when there’s direct competition, the public sector can often hold its own.

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