Laura Tingle’s story that the Coalition are planning a mini-budget if elected featured on the front page of today’s Financial Review. Tony Abbott downplayed the prospect on radio this morning, probably because to do otherwise would be to be seen as being cocky about his electoral prospects. Joe Hockey did indicate that an incoming Coalition government would be seeking to implement its savings quickly.
The most likely outcome of a Coalition victory would be a proclamation that “the budget is in worse shape than we thought!”, swiftly followed by an austerity package of cuts, and a re-evaluation of promises made during the campaign.
Bob Hawke did it. Peter Costello did it. And this year, David Cameron did it in the UK.
The UK parallel is very significant – because at least in the British election, the fiscal stance of the state was openly debated. Labor and the Liberal Democrats agreed budget cuts were necessary, but sought to delay them in case of a double dip recession. The eventual Tory/Lib Dem government has been swinging the axe almost from its first day in office.
In Australia, by contrast, we’re not seeing an honest debate on economic management.
Labor, spooked by the ability of the ‘debt and deficit’ message to cut through, refuses to contemplate the prospect of economic contagion from further world financial shocks. Nor is yesterday’s Reserve Bank decision to leave rates where they are evidence of a vibrant economy – in fact it’s evidence of a sectorally weak economy.
Neither Wayne Swan nor Julia Gillard have been convincing in responding to press questions about the government’s strategy for economic policy over the next term.
Meanwhile, a Coalition government would be ripping $24 billion out of an economy which might be enjoying good terms of trade, but where consumer spending is sluggish and the housing industry tanking (with important flow on effects for housing availability and affordability).
Julia Gillard has called for a debate on economic management. That would be a good thing, if it was an honest one, because that’s precisely what we’re not having in this campaign.
Cross-posted at The Drumroll.
The ALP is not arguing it’s case strongly – I caught a grab of Andrew Robb on the ABC news this morning and he sounded much more convincing (setting aside that he was talking a load of piffle about the debt burden that the ALP have created). Then we heard Wayne Swan waffle about the interest rate rises and how the coalition would increase cost of living pressures.
There has been little by way of explantion on how we dodged a bullet during the GFC – maybe that won’t resonate but ffs they have to at least try!
Hi, I have a new post up at the Cafe:
This Man Could Be The Next Treasurer…Gawd Help Us
The following is a transcript I made from part of an interview between ABC 2 Breakfast host Virginia Trioli & Shadow Treasurer Joe Hockey.
Plenty of reductionist, vague & ill-informed statements on the part of Hockey I reckon
Some odd statements. It doesn’t matter what the credit rating is?
Hmmm…that’s sloppy Joe.
http://cafewhispers.wordpress.com/2010/08/04/this-man-could-be-the-next-treasurer-gawd-help-us/
N’
But I thought stable interest, inflation and unemployment rates were signs of a reasonable economy and no reason to turf the incumbent government. Correct me if I’m wrong…
Megan, if that were the case the ALP wouldn’t have won the last election.
Gillard, Swan and Rudd gave the game away last year when they failed to defend the successful home insulation scheme. That failure has led to all the others, leaving them defenceless against opposition charges of waste and incompetence, accepted by the media as established fact. Having acted boldly on the basis of good Treasury advice in a time of crisis, they revealed themselves as flea-hearted when faced by pipsqueaks like Hunt and Pyne. It’s too late now.
There is a very real risk to the economy from the Coalition’s threat to attack a non-existent public sector debt ‘problem’.
Domestic demand is faltering and beyond mining and pubic sector spending, growth is pallid.
The media (wake up!) needs to ask Abbott and Hockey that if Australia’s public debt position is ‘out of control’ why is this not reflected in bond yields, which are going DOWN.
@4 When Howard lost in 2007, interest rates were spiking, inflation was spiking and the unemployment rate – er I forget….
- Unemployment rate was at a 32 year low in May 2007. But that’s still 2 out of 3.
This really isn’t a big deal macroeconomically. Monetary policy is endogeous to fiscl policy. In other words, if an Abbott government tightens fiscal policy more rapidly than an ALP would have, the RBA will simply have an easier monetary policy to offset the macroeconomic impact. When the RBA sets monetary policy, on the fiscal front what they pay most attention to is the change in the fiscal balance from one year to the next. When setting rates today, they form an expectation of the likely path of future fiscal policy and then set their own policy accordingly. If an Abbott government changes that expected path, the path for monetary policy will also change.
Whether there are further shocks from the global economy and global financial markets is in a sense irrelevent. It is an event risk that can be dealt with if the need arises. So, if there was a major external shock which policymakers thought would damage the local economy, both fiscal and monetary policy settings would be adjusted accordingly.
The focus should be less on the short-term macro impact of fiscal tightening by Abbott, and more on the individual cuts themselves. Are they going to cut programmes that are welfare enhancing or contribute to higher future productivity? If so, that is the grounds on which their policy should be opposed on.
The opposition’s debt arguments at the moment are silly, no doubt, given Australia’s vastly superior relative fiscal position. But given that Australian short-term interest rates are close to neutral, there is ample room for monetary policy to adjust to prevent much of a macro fall-out from tighter fiscal policy. Note, this is a very different situtation to what exists in the US and Europe, where short-term rates are more or less at the zero lower bound, and so too rapid fiscal tightening probably won’t be able to be offset by easier monetary policy.
Can I say, this has put me in mind of the vile and destructive Costello budget that followed Howard’s ascent, back in the mid nineties.
Remember the debt truck idiocy?
Then a budget that savaged social spending and exacerbated the misery of many Australians with high unemployment and welfare bashing that didn’t ease till mid this decade.
Labor outsider,
what makes you certain that looser monetary policy will automatically offset the effects of fiscal tightening, especially if serious austerity is pursued?
As you note, US and European interest rates are close to zero. The effect of this on stimulating consumer borrowing and spending appears to be very limited to date, as evidenced by persistent sky-high unemployment. True, Australians have not suffered the shock of severe recession but consumer spending isn’t exactly roaring like a bull at the gate either and the economy is generally softish.
I do not share your seeming confidence that a sharp fiscal contraction can be easily countered by simply easing monetary policy under current conditions. I think the likely effect of serious austerity measures would be a significant rise in unemployment – not an environment conducive to inspiring the public at large to borrow and spend more simply because it is a bit cheaper or because they are paying a bit less on the mortgage.
What is your empircal basis of that statement Flynnboy?
Are you suggesting that if the next government were to tighten fiscal policy that the impact could not be offset by looser monetary policy? Really?
There is absolutely no evidence for that claim. The monetary transmission mechanism in Australia is working effectively and lower interest rates would stimulate spending on consumer durables and raise residential investment (relative to baseline) in the same way they have always done.
Indeed, it is widely understood that in a small open economy with a flexible exchange rate, monetary policy should be more effective in stimulating the economy than fiscal policy.
The opposition aren’t going to engage in a fiscal tightening of much more than a percent of GDP a year. A tightening of the magnitude could easily be counteracted by the RBA.
And you can’t judge the low interest rates elswhere on the basis of current economic conditions. You need to think about the counterfactual. No serious economist thinks that if the Fed and ECB had not offered the monetary support they have through low interest rates that their economies wouldn’t be peforming even worse than now.
Megan at 7 & 8
“But that’s still 2 out of 3.”
Not even. According to the RBA:
Cash rate = 4.5%
Inflation = 3.1%
Hmmmm,
Let’s try that cash rate again. Say 6.75% on 6 Nov 2007.
“Are you suggesting that if the next government were to tighten fiscal policy that the impact could not be offset by looser monetary policy? Really?”
Yes, I am suggesting it is a possibility we should entertain rather than discount altogether. If we cast our minds back a short few years, we would find many of the worlds economists, if not the majority, confidently saying that a GFC-type event was so incredibly unlikely to happen that we might as well discount the possibility. What was the empirical basis of that claim, proven wrong in such a spectacular fashion?
“No serious economist thinks that if the Fed and ECB had not offered the monetary support they have through low interest rates that their economies wouldn’t be peforming even worse than now.”
I don’t dispute that. However, nor do I disregard the fact that the extremely accomodative monetary policy that the bulk of the advanced world currently has in place has had little measurable positve effect thus far. Perhaps it is unwise to place too heavy a reliance on monetary policy versus fiscal policy. Ireland has pursued a heavy fiscal austerity approach in tandem with extremely loose monetary policy. Result to date – near depressionary conditions, extremely weak demand and unemployment hovering around the 14% mark.
I’m not suggesting that Australia is Ireland. Clearly it is not since we run two very different monetary systems for starters. A fully sovereign, fiat currency issuing government vesus monetary union member. But I’m not sure we should be predicting the extent of the coalitions fiscal tightening, should they prevail. Exactly what they might do over the next three years is unknowable in advance. Should that transpire, I guess we may well find out to what extent directly subtracting demand from the economy can be offset by making it cheaper to be in debt.
The comparison with Ireland is just downright ridiculous. Ireland doesn’t even have an independent monetary policy. And fiscal austerity has been the natural implication of financial markets only being prepared to carry Irish debt at a substantial risk premium.
And so, because the majority of economists didn’t forecast the GFC that implies that you can just make stuff up about the relative impact of monetary and fiscal policy in a small open economy? Give me a break. Fiscal loosening was employed in Australia as an emergency short-term measure to support confidece in the economy at a time when there were concerns about the efficacy of monetary policy and the length of time that interest rate reductions would take to have an effect. Those conditions simply don’t exist right now.
If there were to be another major shock to the international economy, then the right balance between monetary and fiscal policy would probably change. But you shouldn’t conduct fiscal policy on that basis now.
You simply can’t say that monetary stimulus has not had an impact without thinking about the counterfactual. Sorry. That would be like saying that the US fiscal stimulus had no impact because growth remains weak and unemployment high. You don’t support that but it would be equally consistent with your point about monetary policy.
“The comparison with Ireland is just downright ridiculous. Ireland doesn’t even have an independent monetary policy. And fiscal austerity has been the natural implication of financial markets only being prepared to carry Irish debt at a substantial risk premium.”
Why is pointing out a current example of a sharp fiscal tightening existing hand in hand with extremely loose monetary policy with the result today of ongoing extremely poor economic performance and the misery of mass unemployment downright ridiculous? Simply pointing out the fact that very low interest rates are not succeeding in offsetting a government fiscal squeeze in any meaningful way and that nor are very low interest rates encouraging a strong wave of consumer borrowing and spending across much of the advanced world after such a length of time doesn’t seem ridiculous to me, it seems significant.
When you read my post – for the first time it would seem – you will note that I already said that Ireland does not have an independent monetary policy – ie that it is a member of a monetary union – and it’s monetary policy settings are under the control of the ECB. Why you appear to think that this invalidates the real-time observation that loosening monetary policy does not necessarily offset fiscal tightening isn’t clear to me.
Yes the poor Irish – peripheral EU members with no ability to issue their own currency either. And the result of austerity policies designed to bring down their deficit and make bonds more attractive? All the forementioned plus the budget deficit has roughly doubled. And I thought I heard the other day that after such a heroic effort, the ratings agencies have downgraded them. Talk about a self-defeating endevour.
“And so, because the majority of economists didn’t forecast the GFC that implies that you can just make stuff up about the relative impact of monetary and fiscal policy in a small open economy?”
What stuff have I supposedly made up? The assertion that monetary policy loosening will always nullify the effects of fiscal tightening in Australia with no net negative effects seems like an arbitary rule to me. It certainly isn’t the same as an accounting rule such as that the total government budget surplus must equal the total private sector deficit and vice versa, something that is true by definition. Any argument that consumers will always borrow/spend more in response to lower interest rates no matter what seems spurious.
I would conduct fiscal policy on the basis that as the initial effect of the stimulus has wound down, the economy is seen to be less robust than we thought. Consumer spending has not surged back to pre-GFC levels and house price growth appears to be flattening. Those are facts, not my opinion. After the biggest debt binge in history, the private sector needs to repair it’s balance sheet and reduce debt-fuelled consumption. It looks to be possibly occurring in other places such as the US. Is this occurring in Australia at present? I can’t honestly say but that the big reatilers are complaining about ongoing lacklustre sales necessitating fairly heavy discounting could be significant.
I have not said that I thought that expansionary monetary policy has had no impact – I simply question the extent of that impact. As to the differences between the size and composition of fiscal stimulus packages in different countries, I think some interesting comparisons could probably be made. In countries such as the US, they were certainly effective at bailing out the rich – as they were designed to do there – but it looks like Joe six-pack largely missed out, in contrast to the way it was implemented here.
Stiglitz said the Australian economy should do well from (a) resource exports (b) tourism (c) education, with China important in all three.
Today a trade surplus of $3.5 billion was announced for June, against forecasts on $1.8 billion largely because exports of metal ores surged 23% and shipments of coal jumped by 15%.
Let me repeat FB.
All empirical evidence from Australia suggests that monetary policy has a larger, not a smaller impact on aggregate demand than fiscal policy unless the monetary transmission mechanism isn’t working properly. With short-term rates close to neutral, there is ample room for monetary policy to be loosened if fiscal policy is tightened more quickly than expected. What is arbitrary is your assertion to the contrary without actually familiarising yourself with any of the modelling of these things in Australia.
The partial weakness in housing and consumption is the direct result of the RBA’s earlier tightening of monetary policy. It is completely consistent with the assertion that monetary policy has a significant impact on aggregate demand. Unless you believe that the removal of emergency monetary settings is only weakly related to the slowdown we have seen, can you explain why a reversal of those settings would be unable to counteract a small tightening of fiscal policy?
The comparison with Ireland is nonsensical because: a) the size of the fisal contraction is an order of magnitude larger than what is necessary here; b) the monetary transmission mechanism has broken down in Ireland because of the deleveraging of its failed banking sector. The fact that near zero rates has not been enough to sustain a recovery in Ireland in the face of fiscal austerity tells you nothing about the likely impact of monetary loosening in Australia in response to a comparatively small fiscal tightening.
If Ireland had not undertaken an austerity programme they would be in a similar place as Greece right now. The private sector would effectively stopped lending them money at interest rates they could afford to pay back. The only way out for them is via an internal deflation.
Finally, it is completely fallacious that the US stimulus was primarily directed at wealthier households. Their stimulus had a large infrastructure component, included tax cuts throughout the income distribution and even involved extending eligibility for unemployment insurance.
FWIW, fiscal stimulus has almost certainly had a positive impact in the US. The issue is that the size of the shock was much larger than we faced here. Again, you can’t analyse these things properly without thinking about the counterfactual.