In terms of the inflationary impact of infrastructure investment, you have failed to respond to Stevens’ point about the difference between managing short-term inflation impacts and the more difficult job of counter-acting longer-term structural inflation.

There is a very sound case that Howard and Costello have mismanaged fiscal policy by using it in a pro-cyclical fashion. They have masked their irresponsibility by using the nonsensical argument that the tax cuts are not inflationary because the budget is being kept in surplus. Tax cuts fuel consumer spending without any concomitant increase in supply. That is why they pose a greater threat of longer-term difficult-to-manage structural inflation that investing in infrastructure.

In saying this, I think the state governments have been just as lax in failing to address supply issues. New South Wales, for instance, surfed the wave of the property boom for years, gladly sucking in stamp duty and spitting it out in non-productive pump priming.

The point is Rudd’s Labor would be on strong ground, if it has the guts to do so, to pass up the opportunity for more tax cuts and paid more attention to infrastructure – both industrial and social.

The argument that was being made was that the tax cuts are inflationary and the alternative was infrastructure spending, implying that that was non-inflationary.

You have now admitted that, as Stevens said, infrastructure spending is also inflationary. It then comes down to the question of which is worse – tax-cuts inflation or infrastructure inflation.

Potential scenario – AUD keeps rising, Turkey backs off on it’s Kurdish incursion rhetoric causing oil prices to fall from current highs, it rains at least averagely next year in the Murray-Darling causing falls in grocery prices. All having a deflationary effect. If that happens, what is so bad about not collecting so much tax revenue? Inflation is currently under control, no reason why it shouldn’t continue to be so.

As to “social” infrastructure, I would be interested to hear how you define that. I would have thought that investing in our skills capacity through improved education increases our long-term ability to grow without stoking inflation pressures.

In any case, there are social goods in improving our health and education systems beyond dry arguments about productivity.

Grace and Nayum, et al, appear to be saying that reducing taxes is inflationary and building infrastructure isn’t.

Stevens obvioulsy agrees that infrastructure building is inflationary – “trying to manage the short-term impact of that on demand so that we do not kind of blow up inflation on the way through.”

Spending on infrastrucutre in a labour supply constrained economy creates wage inflation pressure, additional to the demand for limited goods and services. Tax cuts are not only spent on domestic goods, they are also spent on imports, saved, invested, reduce debt, etc.

So you tell me – which is more inflationary – tax cuts or infrastrucutre investment (and maybe a comparison of the inflationary effects of social versus productive infrastructure spending)?

And note that Stephens was talking about GDP increasing infrastructure “longer term supply capacity”, not social infrastucture (which is what I assume the left would want the money spent on) which adds little to GDP.

Yep – building new infrastructure in a labour shortage scenario is not inflationary.

I’ve learnt something today they never taught me in economics at three different unis!!! No wonder education is up the kyber!!

Err, Razor, maybe then you went to a different school than Glenn Stevens, the RBA governor. Asked at his last parliamentary testimony about government spending on infrastructure, he said:

“If the spending is putting in place genuine infrastructure, that does two things. It
adds to demand in the short term, but it also adds to supply in the long term. Without wanting to endorse or otherwise particular projects, I think it is reasonably clear that we need more supply
of infrastructure over time for the economy to grow; otherwise we will be capacity constrained
permanently. So it is a matter of putting in place that longer term supply capacity and trying to manage the short-term impact of that on demand so that we do not kind of blow up inflation on
the way through. If we can manage that then the economy has good growth prospects in the
medium term because of the additional supply capacity that has been put in place.”

Lindsay Tanner are well across these issues. Let’s hope Labor responds well.

Kim, Lindsay Tanner is too busy looking after his own bacon in Melbourne doing ridiculous YouTube videos slagging the Greens off and pumping up Family First. I kid you not.

I guess the other question is; how could that money be used in a way that’s not inflationary? Presumably it has to be sequestered away somewhere and not used to fund schools/hospitals/roads?

Yep – building new infrastructure in a labour shortage scenario is not inflationary.

I’ve learnt something today they never taught me in economics at three different unis!!! No wonder education is up the kyber!!

BBB