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!).
3 comments:
Well, things look like they are heading that way.
That is what the various future funds seem to be doing - busily ferreting money away, to be doled out to universities, etc at some point in the future by the various independent "guardians" as they see fit.
Nice one again Peter!
I'd be interested on your take on Future/Education funds (alex robson's comment), their role in inflating stock prices, and the risks if the boards suffer a bear attack.
At least in the quote you take from Gittins he's not saying the state of affairs he's talking about is good - he's saying that it's the state of affairs. Of course the stuff about how runing a surplus can't be inflationary is a hoot. It depends on the circumstances pretty obviously.
By the way, the idea of an independent fiscal authority solves two problems - managing the fiscal stance with some sensitivity to the economic cycle and the general political problem of fiscal responsibility over the longer term.
They're quite separate and separable problems - something often missed.
Of those who expressed scepticism about the model many said it was because they opposed 'fine tuning' - even though we've never given up on 'coarse tuning' which raises all the same issues. If you oppose fine or coarse tuning you should still support an independent fiscal authority and you tell it not to tune fiscal policy with an eye for the cycle or appoint people who won't.
It continues to voucsafe fiscal responsibility far better than the alternatives (like 'budget honesty' legislation - stop that laughing up the back - and 'balanced budget amendments' which have never worked as politicians have always worked around them. This is probably fortunate as things might well be worse if they didn't rort them. As Bernard says when Hacker says that the civil service seems to exist to prevent politicians implementing their promises. "Well somone has to".
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