My letter published below supports the government’s policy of move to a budget surplus in 2012-13. This is contrary to the advice of almost all economic commentators,
and contrary to the government’s stated belief that the adoption of Keynesian policies in 2008-09 prevented Australia from experiencing a recession ie that logic would imply that the large reversal of the Keynesian stimulus now envisaged should slow economic growth. Past experience quoted in my letter (and other analysis) shows that fiscal consolidation may not have that effect.
In passing I applaud the suggestion by Shadow Treasurer Hockey, made in London(!), that there should be a reduction in middle class welfare. This has created a furore because it exposes the Coalition to the obvious question – where are you going to cut? Hopefully, it will lead the Coalition (after the budget) to provide some indication of what it has in mind: it will need that if it is to have a mandate to act after the election. In my 2005 report on spending reductions, prepared for ACCI, I showed that the main potential areas for reductions would derive from households with incomes in the top two quintiles, to which an estimated 30 per cent of social security, education and health benefits were then being paid.
Des Moore
Gillard is right on budget surplus
letter published in The Australian Financial Review, 20 April 2012
Laura Tingle reports Prime Minister Julia Gillard’s rejection of the view that a large move to a budget surplus “will crush the economy” (“PM: surplus can push down interest rates”, April 19). This appears to be a reversal of the earlier government view that the large move to a deficit in 2008-09 allowed Australia to avoid a recession.
However, a surplus policy for 2012-13 is not inconsistent with the experience following the budget policy adopted by the Hawke/Keating government in 1988-99. After it cut spending by 3.1 per cent in real terms and increased the surplus from 0.6 to 2.0 per cent of GDP, economic growth in 1989-90 continued at an above average rate.
Equally, growth remained strong following the tightening of budget policy in 1999-00 and 2000-01.
Of course, whether a surplus in 2012-13 will allow predicted average economic growth will depend importantly on whether the measures primarily affect higher income earners and/or companies with profitable investment outlooks. Such measures, which could for example reduce “middle class” welfare as suggested (at long last) by Shadow Treasurer Hockey, would likely effect only limited reductions in demand and growth. Also relevant is the Swedish policy adopted after the GFC, involving a reduction in taxes and spending that led to two years of strong economic growth.
Additionally, a reversal of the large deficits in each of four years of between 2 and 4 per cent will help retain Australia’s credit rating and improve confidence. The latter is badly needed.
What of the IMF study suggesting fiscal consolidation could hurt growth? (“IMF preaches moderation in spending cuts”, 19/4). That organisation has lost credibility over its failure to diagnose the GFC, its repercussions and the remedies.
Des Moore
Institute for Private Enterprise
Melbourne Vic