Many of the (economic) objections to my argument that we ought to be cutting spending faster, and saving more of the proceeds of the boom are in some way linked to the following two propositions:
1/ the economy is too fragile just now
2/ it’s not possible to do more, given the lingering effects of the crisis
I don’t buy argument one. The economy is set to boom – thanks to mining investment.
Besides, recession is comparatively rare – it most typically comes from external shocks of some type. In the present case, it’s most likely to come to Australia due to some exogenous global shock – and if/when that does occur, the best thing we can do is to have our fiscal house in order.
The world is uncertain, so it’s good policy to have as tight a budget as possible. If the fiscal house is put in order during the good times, fiscal policy can be used to buffer the economy when shocks arrive.
Those who had been careful and prudent prior to the GFC tended to obtain better outcomes than those that were not so careful. I think this demonstrates the value of keeping one’s books in order.
As for argument two – that the economy is too fragile due to the lingering effects of the GFC: well, Iceland is trying harder than we are. It’s startling to note that despite our economic differences, the cyclical deterioation during the GFC was similar, and that Australia is lagging in the repair job.
The above chart is of the General Government Cyclically Adjusted Overall Balance (%GDP) – it’s from the IMF’s April Fiscal Monitor. The IMF does not adjust for the terms of trade when they make their structural budget balance calculations, so this understates the size of the Australian structural budget deficit.
It’s sobering to see that Australia’s fiscal trajectory has been similar to Iceland – despite the fact that we did not have a financial crisis and did not have a recession.
Part of the reason Australia had better economic outcomes is because we had the fiscal space for aggressively counter-cyclical policy when the GFC arrived. At the time, that was the correct policy.
Now that the crisis is past, and that we are on the edge of a boom, the Government ought to be pulling back and making space for the private sector. There is no better time to aggressively tighten fiscal policy than during a once in a 150yr terms of trade boom, when the economy is at full employment.