Some (including new Treasury Sec Dr Parkinson) claim that we should not pull back on fiscal policy any harder lest we hurt the recovery. I find this unlikely.
We have done it before in similar circumstances – in response to the Korean Wool boom of the 1950s.
According to Treasury research:
The boom in wool prices in the 1950s led to the largest increase in the terms of trade in Australia’s history. This occurred at a time when the Australian economy was near full employment and already facing demand pressures. Not surprisingly, inflation surged in response to these circumstances. The delayed policy responses were the 1951‐52 ‘horror budget’, somewhat tighter monetary policy and a move away from wage indexation. These interventions, combined with a fall in the wool price, quickly snuffed out the upsurge in inflation, with only a mild recession. The Treasurer of the day regarded this as ‘a quite unprecedented achievement’.
So yes, we tried it, and it worked —
Additionally, I am reminded of something Dr Henry used to say – at full employment Government policy doesn’t create or destroy jobs, it just moves them around.
Most economists agree that the outlook is for very strong growth – and most folks (not just economists) agree that we are just about at full employment.
There’s never been a better time for belt tightening.