Wayne Swan got asked a question by Bob Katter in question time the other day. Part of the answer involved Swan saying (paraphrasing) if you’re a Keynesian on the way down you have to be a Keynesian on the way up. While I don’t endorse this ‘Keynesian’ business, I do think it’s worthwhile to pick a strategy and stick to it. That is what Swan is doing. A whole bunch of people are going to carry on about ‘what do you do when the facts change …’, well the facts have not changed. Swan believes that the economy will grow at trend this year, if so there is no reason, under his own logic, for a deficit.
A problem the government faces is that a lot of government spending ends up being considered permanent income by the recipients. We saw this when the government tried to stop paying Peter Costello’s ‘once-off payments’ that got paid every year. Then there is the understanding of the strategy itself. As our very own Judith Sloan explains in the Australian in the context of the Australian government criticising the Europeans.
It would not be surprising if people feel perplexed, even baffled. Just four years ago we were being taught the virtue of spending like drunken sailors, now we are bagging out drunken sailors.
So what is the game plan for the year? The Gillard government has doubled down. Laura Tingle tells the story
… the Prime Minister, on Wednesday, and yesterday the Treasurer, in Parliament, have committed the government to that surplus so firmly that they may as well have pledged it in blood.
The May 8 budget is now just three months away. There is no wriggle room for the government to walk away from its surplus declaration.
Good. While the government hopes to embarrass the opposition on economic policy, the pressure really is on Gillard and Swan. I indicated this yesterday and Tingle confirms today.
It needs to finally deliver on its surplus forecast for 2012-13: not just confirm the existing forecast for a surplus on May 8, but ensure it is still forecasting a surplus in 2012-13 in the midyear review in November, and in next year’s budget.
Unusually for government there is a very specific policy target that is locked in and locked down. Tingle seems unsure they can pull it off.
So the government is gambling it can turn the budget around by $38 billion in just 12 months, even though its own growth forecasts have been revised down (and even though, as Joe Hockey pointed out yesterday, it has been ridiculing the Coalition’s suggestions it could do something of a similar magnitude).
There haven’t been any signs of nervousness around the government in the past couple of weeks about the difficulties of achieving such a mammoth task, even though now it is in effect pledged in blood.
Maybe someone knows something we don’t about revenues.
How does the Gillard-Rudd leadership tussle interact with the budget strategy? Not well. Changing back to Rudd doesn’t get the government out of the Keynesian strategy – it was devised while Rudd was PM. The only way the government can wiggle out of this strategy is to change PM to someone other than Rudd and dump Swan.
Ross Greenwood played the quote on his evening show, and when you hear Katter’s question it is clear Swan was just blathering off topic. Ross Greenwood tries not to be partisan, but he was stunned by the ineptness of the comment.
Token
10 Feb 12 at 8:47 am
Oh yes. Watching the government blather during QT has been simply astonishing.
Sinclair Davidson
10 Feb 12 at 8:50 am
I’m glad you did do a piece on it Sinc, I had wanted to raise it as a point of discussion for the Cat.
It sounded like Swan religiously sticts to his JM Keynes instruction manual with the same unyielding, black & white view, that the Wivenhoe damn engineers did with their manual.
Token
10 Feb 12 at 8:57 am
…religiously sticks/follows…
Token
10 Feb 12 at 8:58 am
LOL, the problem at Wivenhoe is the claim that they did not stick to the manual.
I honestly don’t know why anyone gives Swan any credit at all. Such a fuckwit. But to the topic, surely the way down is not the same as the way up and so policy prescriptions could well be different.
Pedro
10 Feb 12 at 9:05 am
A description of everything that is wrong in Australian politics, in eleven simple words.
Rabz
10 Feb 12 at 9:06 am
I think the discussion needs to be rounded out a little more.
If you read Buchanan and Wagner on this issue, they do point out that theoretically Keynesians prefer a symmetrical fiscal policy over time – i.e., a stance reflected in the “Keynesians on way up, and way down” rhetoric propounded by Swan.
The problem, as also identified by Buchanan-Wagner, is that the conduct of fiscal policy is being managed by politicians who prefer expenditure (and debt) over taxation to finance the expenditure.
Rudd and Swan were very eager to go early and hard into budgetary deficit, but how long since the negative GDP growth result in December quarter 2008 have we since been waiting for the symmetrical return to surplus? hmmm?!!
Julie Novak
10 Feb 12 at 9:23 am
Julie – you’re right. I don’t to give the impression that the Keynesian strategy is a good one. Just that he has a strategy and is following it. We’re going to be paying off the debt from the Dec quarter panic for the next ten years.
Sinclair Davidson
10 Feb 12 at 9:30 am
we were going to have debt anyway.
This way we avoided a recession.
what panic.
Inflation has consistently fallen, there is an output gap. if they had panicked both would be different.
The government thus far this financial year has detracted 0.5 percentage points from GDP. It wil lagain next financial year.
Only a fool would call that expansionary.
The fiscal consolidation is quite quick again inidcating the stimulus was a success.
If you attempt to go into surplus too quickly you dry up any recovery.
A tighter fiscal policy than now would simply bring on the possibility of recession when there is no need.
I can only assume the change in attitude to the surplus next financial year, is because of advice they are now getting from Treasury.
Of course if Swan had the luxury of taxation receipts Costello had it would already be there.
On your Marx
10 Feb 12 at 9:46 am
Oh yes Homes. They rebased the CPI from a survey taken during the GFC and wow, presto, there is a structural break in the data which sees lower inflation.
Hand waving for selective Keynesianism.
I cannot believe you had the temerity to sat that Reagan intentionally went into a long term deficit through his tax cuts, then you preach the selective gospel of Keynes.
When a Labor Government cannot balance the budget as promised, it is because they are shoring us up for the next recession.
This is hilarious yet tragic. Keatings 1995 splurge lead to a mini recession here (and lost him the election after an otherwise fairly normal recovery).
What you are saying is easily contradicted theory repudiated by the facts.
.
10 Feb 12 at 9:52 am
How much of a giant pile of cash does the Coalition have to leave these ALP idiots before it’s enough for them to get it right? The ALP started with an economy better than any in living memory and a metric shitload of surplus.
The simple fact is they’re in debt and flailing not because they are Keynesians but because they are completely shit at their job.
wreckage
10 Feb 12 at 10:52 am
“There haven’t been any signs of nervousness around the government in the past couple of weeks about the difficulties of achieving such a mammoth task,”
Shell shock.
Or they have become the walking dead.
dakingisdead
10 Feb 12 at 12:11 pm
Firstly you do not know me at all.
The CPI is now profoundly more accurate than before.
Inflation rose when Costello was lax on fiscal policy and added to capacity pressures.
Inflation has not been rising ever since the GFC, It would have if the Stimulus was too large.
There is nothing selective about Keynesian economics.
you use fiscal policy if monetary policy is not working. This means a deficit when a GFC comes along.
It also means fiscal consolidation after it has passed. That is what is going on now at a record pace.
At present the government is taking out 0.5 percentage points from GDP. It appears people here think it should be more however the private sector is simply not taking up that kind of slack at present as Martin Parkinson has pointed out.
A mini-recession when?
In your imagination.
I agree Keating’s splurge was unnecessary,not needed and certainly not Keynesian.
The counter-factual is that if the Coalition were in power during the same time debt would probably be higher. The Budget deficit would be much higher now.
Oh and for the record I only believe in tax cuts when you have equivalent spending cuts.
On your Marx
10 Feb 12 at 12:12 pm
This is a lie. It was rebased during a recession of sorts.
Tax cuts do not lead to infrastructure being tapped out.
Save for your convenient assumptions about Shane Wand’s budget.
Monetary policy worked and was actually too generous.
Wrong again Homer. Unemployment was falling until he went crazy. This cost him the next election.
You probably haven’t *stopped beating your wife*
Which Costello delivered.
.
10 Feb 12 at 12:17 pm
I have heard from colleagues in the APS they have been instructed to bring forward into the current fianncial year as much expenditure as possible, or if that can’t be done, defer until 13-14. There will be no new expenditure in 12-13.
Smoke and mirrors people, smoke and mirrors.
A very wet March will do them in.
Entropy
10 Feb 12 at 2:10 pm
Who gives a rodent’s backside what the idiots do?
We’re still going to see a massive budget deficit.
Rabz
10 Feb 12 at 2:37 pm
Jeez Mark, do you think the ABS will rort the CPI when they do their regular review?
Homer, if I recall the inflation Swan scare-mongered about as the world got stuck in the current heading over the GFC falls was largely imported. It wasn’t showing up in wage data and there was a lot of angst at the time as to whether the RBA had made the right call on rates, which it turned out they didn’t.
And for the record, you only believe in whatever is ALP policy at the time.
pedro
10 Feb 12 at 2:41 pm
Sorry I thought you understand statistics.
Rebasing a series is simply making it more accurate. This happens every 5 years here. We also have seasonally adjusted data now which we did not previously which also improves the series.
Tax cuts given out at a time of capacity constraints simply means more spending goes into inflation not actual goods and services.
Assumptions behind budget and Keynesian economics are two different things. you are confused.
Monetary policy wasn’t working. Ever looked at V. Why did it fall down a hole?
Ever wondered why the credit aggregates fell as well.
Banks couldn’t get the funding they were able to pre-GFC even with a government guarantee. They then cut back on lending. The Bank I was with was affected in 2007, 2008 was a nightmare.
When was this mythical mini-recession?
no Costello never gave us spending cuts the size of the tax cuts. He simply gave income tax cuts on the assumption increased company tax revenue would cover it.
This is the main reason why he increased his structural budget deficits.
The counter-factual is rather easy.
We know the tax revenues that has happened under Labour.
It is highly unlikely the coalition would have acted as early or as robust as the ALP. Thus we would have had lower growth possibly at least three quarters of negative growth, possibly more.
So tax revenues would be weaker.
We know the Structural deficit was increasing with each budget so an assumption of 1.5% is pretty conservative and given it would be mostly tax cuts it would burn a larger hole in tax revenues then we have seen.
Even with a recovery there would be no natural spending cuts you have with a stimulus.
You end up with much higher unemployment and a higher deficit over time.
You also have a slower and less robust recovery.
We have seen three years of below trend growth with a stimulus. so it would be considerably lower without one.
You end up with a government unable to reduce its defcit over time because it chose the wrong strategy.
Just look at Poland.
On your Marx
10 Feb 12 at 3:55 pm
Structreal deficits are shit easy to close, Homer. Just reduce the spending. No biggie. It’s a piece of cake really.
JC
10 Feb 12 at 4:04 pm
Oh, not this nonsense. The ALP has a tangibly and consistently worse record on economics by a number of measures.
wreckage
10 Feb 12 at 4:35 pm
A counter-factual is a load of cods-whollop.
The ALP has to please the group has the majority of votes at its policy setting forums and majority votes to choose new members. The trade unions.
The trade union leaders only stay in charge if they bring loot back to its members. Thus, as a group the union approved ALP members have a vested interest to increase government expenditure in order to bring the loot back to its members.
The result is the ALP will over-indulge and run up huge defecits.
The Coalition represents the opposite of those values, and represents of society who are hurt by that mission and thus is supported by people who wish to stem the bleeding and reduce spending.
Name one federal Labor government in Australian history that did not leave behind a bloated public service and debt?
The ALP hates Billy Hughes and Joeseph Lyons left the ALP and joined the conservative opposition to prevent the country going bankrupt. At other times the lying vultures were voted out before they could totally destroy the joint.
Even Keating blew away the good work of Hawke and left Howard a huge defecit.
Token
10 Feb 12 at 4:47 pm
The ALP mythologises the battle between bosses and workers, and the role of unions therein. They must always plump for wage and workplace inflexibility and work for the power of the Unions. Wether or not these things in practice measurably harm the workforce is irrelevant; the ALP simply doesn’t exist without its central belief.
This alone, ignoring all else, is economically harmful.
wreckage
10 Feb 12 at 5:03 pm
Rudd and Swan were very eager to go early and hard into budgetary deficit, but how long since the negative GDP growth result in December quarter 2008 have we since been waiting for the symmetrical return to surplus? hmmm?!!
Lower tax receipts were the major driver of the deficit in 2010/11 and are likely to be again in 2011/12.
sdfc
10 Feb 12 at 7:46 pm
I blog in defence of Wayne Swan. He and his government are never that consist, nor are any other governments.
Thomas Humphrey wrote an excellent 250 year long literature survey of the rules versus discretion debate in the 1998 Richmond Fed Quarterly and found that:
• Keynesian ideas and their many antecedents gain currency when unemployment was the main concern.
• Monetarist ideas tended to reign when price stability was the main problem.
The policy debate keeps recycling because
1. people forget the lessons of the past and
2. For better or worse, politicians and the public have tended to believe that central banks, the focus of his studies, have the power to boost output, employment, and growth permanently.
Humphrey showed that stable policy rules are popular in good times to contain inflation; and when unemployment was rising, discretionary monetary policies returned to policy vogue.
There is no reason to expect the cycles of policy history to not repeat itself for fiscal policy in Australia in the coming few years.
Jim Rose
10 Feb 12 at 7:58 pm
Stable policy rules contributed to the boom leading to the crisis.
sdfc
10 Feb 12 at 8:04 pm
???
sdfc,
If that’s so, Greenspan had the wrong target.
Tell me why targeting low inflation and adequete liquidity on the other hand would be a bad idea.
.
10 Feb 12 at 8:06 pm
It’s too narrow Dot. Central banks pursued CPI inflation targets and ignored asset price inflation and the associated rise in debt.
sdfc
10 Feb 12 at 8:11 pm
sdfc, see John taylor, The Rules-Discretion Cycle in Monetary and Fiscal Policy, Finnish Economics Papers, 2011 at http://www.stanford.edu/~johntayl/Finnish%20Economic%20Papers.pdf
This lecture reviews the historical trends in the balance between rules and discretion:
• toward more discretionary policies in the 1960s and 1970s;
• toward more rules-based policies in the 1980s and 1990s; and
• back again toward discretion in recent years.
In each of these swings, monetary policy and fiscal policy moved in the same direction.
These swings correlated with economic performance—unemployment, inflation, economic and financial stability, the frequency and depths of recessions, the length and strength of recoveries.
The lecture provides evidence that the correlation is causal with the moves toward more rules-based policies improving economic performance.
Jim Rose
10 Feb 12 at 8:21 pm
The inflation target may have provided good outcomes in hte 90s Jim put the policy proved inadequate in the 00s.
The 80s was characterised by large fiscal deficits which caused the Fed to run tigher policy than they may have.
sdfc
10 Feb 12 at 8:26 pm
sdfc,
THE FED AND the EUROPEAN CENTRAL bank departed from the talyor rule in the early and mid-2000s.
Their following the taylor rule was the foundation of their policy successes in the 1980s and the 1990s.
see figures 4 and 5 of taylor’s paper.
Jim Rose
10 Feb 12 at 8:34 pm
Jim
The Taylor rule was never their target. I’m not against policy rules. Just narrow CPI inflation target rules.
Taylor’s rule seems to be a NGDP target. I’m in favour of any rule which keeps the cash rate at close to the natural rate of interest as measured by NGDP growth.
sdfc
10 Feb 12 at 8:39 pm
I’ve got to go Jim. But before I do my last comment was problably a bit hasty, there may be more than a grain of truth in what you say.
The Fed did have a fairly good record at keeping the fed funds in the vicinity of NGDP growth, leading into the disastrous late 2004 to 2006 period.
sdfc
10 Feb 12 at 8:53 pm
I agree sdfc, there should be short term flexibility, which is implied by “providing liquidity”
.
10 Feb 12 at 9:06 pm
Dot
There was too much liquidity leading into the crisis.
The fed funds rate held NGDP growth for an extended period. High credit growth. Sharp increases in asset prices. Narrow credit spreads.
Classic symptoms of a credit boom caused by loose money.
sdfc
11 Feb 12 at 12:14 am
SDFC
where was there a clue that inflation had got out of control between 2004/06 causing the Fed to tighen so hard from 06 onward.
Here’s my hunch. The Fed fucking panicked as it saw assets prices move higher and it suddenly went from a CPI focus to an asset (real estate) one. They tightened too hard, they were oblivious to the damage they were causing and finally realized and relented when it was too late.
JC
11 Feb 12 at 12:27 am
JC
They took forever and a day to tighten. 25pts a meeting for seventeen consecutive meetings and all the while the credit boom continued.
sdfc
11 Feb 12 at 12:33 am
So what that it took 17 rate hikes. The never saw it until it was too late. They fucking choked the economy on the pretext of stable prices. Real estate prices were falling from 2006 onward, inflation was reasonably behaved and they were also bamboozled by the spike in commodity prices failing to that it was demand shock emanating from the developing world.
JC
11 Feb 12 at 12:43 am
So you’re solution for a credit boom is loose monetary policy.
sdfc
11 Feb 12 at 12:50 am
No, I’m saying core CPI targeting, or in the Fed’s case anything targeting is a recipe for disaster.
If they’re on a core CPI target a credit isn’t their prime concern, should it be?
JC
11 Feb 12 at 12:56 am
They raised the fed funds from 1.0% to 5.25% the course of 17 meetings. There was no sudden sharp rise in rates. 5.25% is hardly super tight. They were quick to cut rates and pump up the money base when the shit hit the fan in late 2008. Blaming the crisis on tight Fed policy is bullshit.
The fed funds was constently below NGDP growth for an extended period. They were too slow in raising rates.
Without the boom you don’t have the crisis.
sdfc
11 Feb 12 at 1:04 am
SDFC
Gradualism is a shit way to run monetary policy.
You’re still avoiding the issue. Core CPI was well behaved between 2004/ 06.
JC
11 Feb 12 at 1:15 am
Hm, knock the private health insurance rebate, thereby adding to tax receipts as well, move spending forward or delay it beyond the cycle, take policies OFF the budget like the Not Bloody Needed…. what else will they do to fudge us a budget surplus?
BTW I thought Abbott got theirmeasure with his latest answer to the hyperventilation of Labor and their sycophants in media about his “surplus” ability when he gets in–he will provide a surplus in his first year, IF this government provides one this year!
Boom Boom!
Take that Riley, Grattan,Hartcher, Bongiorno …et al!
Jazza
11 Feb 12 at 11:38 am