Wednesday, May 16, 2012

Parkinson's Paradox: The tight budget that's not economically tight

Treasury boss Martin Parkinson says the economy will survive one of the tightest budgets in years in part because its economic effects are more mild than is widely believed.

In answers to questions at the annual Australian Business Economists lunch in Sydney Dr Parkinson said taking the budget from a $44.4 billion deficit to a $1.5 billion surplus amounted to a fiscal contraction of 3.1 per cent of GDP.

But much of the money saved would not have been spent in Australia anyway. It would have gone overseas on defence equipment and foreign aid.

And other decisions in the budget moved spending and concessions from people not likely to spend to people keener to consume.

“We haven’t modelled this formally, so there’s no point looking for it under Freedom of Information,” Dr Parkinson told the audience. “But the macroeconomic effect of the fiscal contraction is probably less than a per cent of GDP.”

“That’s a ballpark figure - 1 per cent of GDP. The fiscal consolidation is 3.1 per cent of GDP, the economic contraction is 1 per cent.”

“This does not mean the fiscal consolidation is not real. The outlays to GDP share will step below 24 per cent and stay there for the next four years. It will be the longest period of outlays below 24 per cent since the late 1970s and early 1980s.”

Responding to commentators who have argued there is no great need for an urgent return to surplus and that the urgency is “political” Dr Parkinson said if the time was not right now when unemployment was low and growth was moving back to trend it might never be right...

“It is surprisingly under‑appreciated that fiscal consolidation in Australia is happening in a far healthier environment than the circumstances facing many other advanced economies. With substantial risks remaining in the global economic environment, it is critical that we move now to recharge the fiscal batteries while circumstances remain favourable.”

Company tax revenue, capital gains tax revenue, and goods and services tax revenue had all been less than expected, for reasons not fully understood. An early return to surplus would help address early one of the key challenges facing government - the gap between the expectations of government and the public’s willingness to pay to meet those expectations.

For the foreseeable future all levels of government faced “razor-thin surpluses at best in the absence of conscious decisions to raise additional revenue or cut outlays”.

Asked whether achieving a forecast surplus by shifting spending from one year to another was best practice, the Treasury secretary said every budget saw “money moved across financial years”.

“It happens all the time, always does. The idea that somehow there is a tablet that says how you must construct your budget, and that the government or the Treasury did something inappropriate this year I completely and utterly reject.”

Dr Parkinson spoke after the release of Reserve Bank minutes showing the board believed conditions in many sectors were “weak” and “soft” when it decided to cut its cash rate 0.50 points on May 1.

The minutes indicate the board decided on 0.50 points rather than 0.25 partly to counteract rate hikes of 0.10 to 0.12 points imposed by the retail banks in February and April.

In today's Sydney Morning Herald and Age

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