Wednesday, May 16, 2007
And how! He doesn't say so in the article itself, but he has written a repudidiation of everything he has written about fiscal policy in the past.
The days of fiscal policy (the budget) being used for macro management are long gone and we'd better get used to it.
I am completely unconvinced, and much more persuaded by the Macquarie Bank's Rory Robertson who in an email to clients has rubbished the idea that the government should give up on fiscal policy.
Who was it last year who invented the catchy story - again doing the rounds today - that tax cuts and increased public spending are not expansionary in an economy that is being hit by an extraordinary terms-of-trade surge, as long as the Budget surplus is projected to remain steady near 1% of GDP? The size of no-policy-change surpluses is irrelevant, somehow the story goes. Going the other way, we should believe that tax hikes would not be contractionary if commodity prices slump big-time down the track, as long as they are large enough to keep the Budget surplus steady near (that now-magical) 1% of GDP? I don't think so.
I would make fiscal policy really work - give it to an independent authority such as the Reserve Bank who would adjust one tax rate (say, the GST or the Medicare levy) monthly as needed.
Nicholas Gruen is among those who have made this suggestion (and in his case got the Business Council to propose it!).