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The surplus we deserve

October 23rd, 2012

Bernard Keane in Crikey wrote exactly what I was going to regarding Wayne Swan’s use of a variety of timing fiddles to keep the 2012-13 Budget in surplus. This was a silly target, to which the government unwisely committed itself when the recovery from the financial crisis looked a bit stronger than they had expected in 2009, and also stronger than it has actually turned out to be. The sensible thing would have been to return to the original schedule of a surplus by 2014-15 (IIRC). But with an Opposition led by an economically illiterate attack dog like Tony Abbott, and a press gallery that’s not much better, that wasn’t an option. So, the next best thing is to shuffle payments and receipts to generate a surplus this year, at the expense of a smaller surplus next year.

I’ll talk a bit more about the substantive measures in the mini-budget (some good and some bad) when I get a little more time free.

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  1. October 23rd, 2012 at 12:37 | #1

    Tony Abbott an

    “economically illiterate attack dog”

    :-)

    p

  2. may
    October 23rd, 2012 at 13:33 | #2

    yesterdays poll thingie showed the perception of economic competence firmly in abbots favour.

    the coalition is a party of perception,always has been.
    plus the commercial broadcasters are in the business of purveying perception.
    more so now that i can ever remember.

    soh

    a rude awakening as to the complete lack of economic competence and costed policies
    (don’t you worry about that) of the coalition is a possibility?
    after all, it is slowly seeping into the public mind that despite all the hanrahan hot air,Australia is not doing too badly at all.
    the political activists of the fossil fuel industry,and the mining industry,and the commercial broadcasting industry,and the “let’s-enable-a-gambling-addict-industry”,etc seem to be running quite hard trying not to lose the old outrage edge.
    must be expensive,but they can afford it.
    and it is not new anymore.
    PR no longer has that glamorous insider vibe,it’s perceived as just wordy bumph.
    a noisy nuisance.
    and the wrecking ball through the economy?
    give us a break.
    but he doesn’t,he and the rest of them go on and on and on spouting a fog of spotlit nothing and “be afraid,be very afraid”.
    there certainly are things that merit concern but there is nothing meriting consideration coming from that direction.
    which is a pity.
    the waste of parliament time in shockjock antics means from my point of view,we haven’t had an opposition loyal to the people of Australia but only to some faffed up ideological sound and light show.

    and incidentally—what would be said of a potential federal cabinet that had as high a percentage of mormons or muslims as abbots has of romans.

    oo i’m in a bad mood.

  3. JB Cairns
    October 23rd, 2012 at 13:39 | #3

    The budget was originally contractionary as it was taking about 3/4 of percentage point from annual growth.

    I do not mind accounting fiddles, timing changes etc. We really do not want nor need a tighter budget.

    The problem at present is not real growth which is above trend, The problem is nominal growth which is below trend.

    This is all important for budgets.

    I agree on committing to a surplus ( in economic terms a balanced budget actually.)If the economy is not strong enough then there is no need. I doubt whether the RBA actually wants to have rates below 3% but they might have to given the circumstances.

    As for people who believe over-spending is the problem.

    If this was the case then we would be experiencing above trend nominal growth, rising inflation and thus the RBA raising rates to curb this.

    It is all completely different to this.

  4. Edumak8
    October 23rd, 2012 at 17:28 | #4

    Agree with you 100%, John. Not a chance that ALP could make the decision to have surplus in 2014-15. Media and Opposition would be baying for blood about broken promises, which seem to be more important than cogent strategy changes. Of course, the majority of the public who only read Headlines and listen to trite one-liners would also be influenced by this, and so their voting choices would follow. Shame really, about voters’ lack of meaningful engagment in the governmnet of the country. It allows the media and opinion from talking-heads to cause dramatic shifts in voting intention without true substance.

  5. October 23rd, 2012 at 18:06 | #5

    @Edumak8

    I agree with what you say.

    BUT, my feeling is that ALP is on a loser whatever they do – for the very reasons you cite.

    If they manage to get their surplus the response will be “So what? No big deal. John Howard’s was bigger.” And the general public won’t have any tangible feeling of what it means anyway.

    If they don’t: “Shock! Outrage! Fury! Bad Economic Managers! Everything Always Better Under LNP….etc..”.

    I see it as ALP stupidity. Feel free to break promises everywhere but dig in over a foolish undertaking they shouldn’t have given in the first place.

  6. Jim Rose
    October 23rd, 2012 at 22:22 | #6

    The median voter has been a fiscal conservative since some time in the 1990s. About then, not having fully costed election promises suddenly became irresponsible – a real barrier to winning.

    Politicians since then have gone out of their way to prove they are fiscal conservatives. Maybe it is a side effect of most workers having significant super savings.

    With any budget deficits now always premised on surpluses later, the notion that a fiscal deficits is expansionary even in a closed economy is weakening.

  7. Patrickb
    October 23rd, 2012 at 22:49 | #7

    @Jim Rose
    Mid 1990s eh? Must have been a passing fad as Howard seemed to think that buckets of cash to the middle class was a solid voter winner. And he was right! And not sure being mortgaged to the hilt on a speculative property valuation is characteristic of the average fiscal conservative. I also don’t think that the median voter gives a pigs ring for the surplus.

  8. Ikonoclast
    October 24th, 2012 at 07:36 | #8

    When will people realise that achieving a surplus (or a deficit) in itself is not the goal of a federal budget?! The goal of the budget is to ensure a healthy economy, full employment, adequate infrastructure and adeqaute social services spending. The method is to do this in a counter-cyclical manner which moderates booms and busts and keeps interest rates and inflation within acceptable parameters. If the government can achieve all the above then the actual deficit or surplus is an irrelevant after effect.

    Seeking to achieve a surplus for its own sake (and irrespective of actual conditions) is as pointless as diabetic trying to achieve an insulin “surplus”. The doctor would tell him or her; “Saving on insulin is not the point of the exercise. The point is to keep you conscious and healthy.”

    The same goes for the government’s creation of fiat money compared to the rate of taxation. The point is not the surplus or the deficit. The point is the health of otherwise of the real economy and the ongoing viability of the financial system.

    A little mentioned fact in all these debates is that a growing economy needs the government to run net deficits over time. Otherwise, the money supply would continuously shrink relative to the economy and severely constrict activity (i.e. eventually cause a depression).

  9. JB Cairns
    October 24th, 2012 at 07:49 | #9

    Actually Jim it is quite the opposite as the IMF has recently showed if done correctly.

    It is impossible to argue this government is not fiscally conservative when it is detracting more than 3/4 of a percentage point from annual growth.

  10. rog
    October 24th, 2012 at 08:05 | #10

    @Patrickb And don’t forget core vs non core promises. Mythology seems to be the one product the Libs have in surplus.

  11. Tom
    October 24th, 2012 at 09:05 | #11

    http://www.census.gov/statab/hist/HS-49.pdf

    http://www.tradingeconomics.com/united-states/government-debt-to-gdp

    Question: Can anyone find a correlation between budget surplus and a reduction in public debt as a % of GDP?

  12. Tom
    October 24th, 2012 at 09:26 | #12

    @Tom

    Correction to the above post in moderation.

    The question should be: Can anyone see a correlation between a budget deficit and increase in public debt as a % of GDP?

  13. John Quiggin
    October 24th, 2012 at 09:35 | #13

    @Tom

    This is pretty much arithmetic, since public debt (at end of) this year is the sum of public debt (at end of)last year and (an appropriate measure of) this year’s deficit.

    If public debt is growing faster than nominal GDP, then public debt/GDP ratio will rise. Note that, since debt is a stock and GDP is a flow, it isn’t strictly correct to refer to debt as a “share” of GDP.

  14. Tom
    October 24th, 2012 at 09:55 | #14

    @John Quiggin

    Yes, but the everyone seems to care about if “the government can service its liabilities”, a measurement using nominal national currency is not appropriate if its not measured against something else (e.g. businesses uses ratios such as debt to asset ratio).

    A budget surplus is meaningless if GDP falls at a same rate the debt in nominal national currency falls (not likely the case in our current economic situation compared to EU). As such, a budget deficit does not mean that it will “decrease the financial soundness of the government” if GDP outgrows the rate at which public debt accumulates. This is a concept which businesses use everyday.

  15. Jim Rose
    October 24th, 2012 at 21:50 | #15

    @JB Cairns The IMF is not a good candidate as an arbiter on fiscal policy. The IMF is so weak that even Australia can get the Fund to delete critical remarks from its reports about Australia.

    The IMF’s standard advice in a developing country crisis of balanced budgets was not tendered when Euroland got into the crisis that was inevitable come the first major recession.

  16. derrida derider
    October 25th, 2012 at 11:24 | #16

    John, if you believe that the 2012-13 surplus is economically harmful why would you not PREFER it to be an accounting surplus only rather than an economic surplus? If the aim is political rather than economic then achieving it by creative accounting without squashing the economy further is a good thing, not a bad thing.

  17. JB Cairns
    October 25th, 2012 at 11:51 | #17

    DD,

    Hey that is what I said!!

    Jim,

    you are confusing an IMF report on a country with a research report on fiscal policy across countires.

  18. JB Cairns
    October 26th, 2012 at 09:11 | #18
  19. JB Cairns
    October 26th, 2012 at 09:11 | #19

    yikes, stuffed up the link but it works

  20. Jim Rose
    October 26th, 2012 at 17:06 | #20

    @JB Cairns Thomas Humphrey wrote an excellent 250 year literature survey of the rules versus discretion debate in the 1998 Richmond Fed Quarterly. He wanted to know if macroeconomics was a progressive science in the sense that superior new ideas relentlessly supplanted inferior old ones.

    Humphrey found that:
    • Keynesian ideas about a lack of demand and their many antecedents gain currency when unemployment was the main concern.
    • Monetarist ideas tended to reign when price stability was the main problem.

    The policy debate keeps recycling because
    1. people forget the lessons of the past and
    2. For better or worse, politicians and the public have tended to believe that central banks have the power to boost output, employment, and growth permanently.

    Humphrey showed that stable policy rules are popular in good times to contain inflation, and when unemployment was rising, discretionary policies returned to policy vogue.

    Humphrey concluded that doctrinal historian knows that much of what passes for novelty and originality in theory and policy is ancient teachings dressed up in modern guises.

    Haberler and Frank Knight also pointed out in their reviews of the General Theory that it lacked originality, and presented old ideas often incorrectly in confusing new vocabularies that made the book difficult to read. To be fair, under Stigler’s rule of scientific priority, Keynes deserves credit because he made sure these old ideas stayed discovered.

  21. Ric
    October 31st, 2012 at 16:24 | #21

    The Peak Oil Poet :
    Tony Abbott an
    “economically illiterate attack dog”

    p

    What I don’t understand is how somebody who is a Rhodes Scholar, Double degree and with economics and master degree graduate qualifications from a credible university can dish up such rubbish

  22. October 31st, 2012 at 17:28 | #22

    @Ric

    when i went to uni if you had to do a masters degree it meant you were no good

    why?

    if you were any good one or more of the following was true

    1. you got snapped up by a top firm before you got your bachelor’s degree
    2. you got snapped up by top firm but got to finish your bachelor’s
    3. you got dragged into honors (and from there you can go straight to PhD)
    4. you got special dispensation for your brilliance and went straight to PhD

    there is also this – one can hardly think of economics as a science – in fact the only truly bright person i ever knew that did in fact head to economics ended up realizing it was all hokum and instead moved into neuroscience and psychology – now doing post doctoral in Israel in decision bias

    i’ve spent my life working with people with lots of degrees

    we get used to a higher class of idiot

    :-)

    pop

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