Today's Budget - the fiscal balance (2)

Another aspect that doesn't get enough attention in the media coverage is whether the Budget is adding to (‘expansionary’) or subtracting from (‘contractionary’) growth in the overall economy. Increases in the fiscal deficit are generally regarded as good for the economy, at least in the short run: this is the orthodox ‘Keynesian’ view. Similarly, tightening fiscal policy (by raising more tax or by lower government spending) is regarded as a brake on the economy. Without doing any sophisticated number-crunching at all,  you’d guess that if Bill English is working the fiscal position from a deficit to a surplus, the Budget must be ‘contractionary’, and you’d be right.

It’s interesting to put numbers on it, though. First, however, a bit of jargon: if the cyclically adjusted deficit this year is (say) 3% of GDP, and next year’s is (say) 2% of GDP, then fiscal policy has tightened by 1% of GDP (either taxes have been raised by 1% of GDP, or government spending is lower by 1% of GDP, or there’s some combination of the two adding up to 1% of GDP). This 1% tightening – the difference between one year’s cyclically adjusted balance and the next – is known as the ‘fiscal impulse’, and is a useful summary of the overall stance of fiscal policy. Okay: end of jargon, here’s a graph of the thing.

Downward pointing bars mean that fiscal policy has got tighter, and it’s probably best to focus most on the right-hand-most ones for each year, which strip out the impact of various earthquake payments. As you can see, fiscal policy is expected to be contractionary pretty much indefinitely into the future.

And that’s fine: despite fiscal policy tightening by about 0.6% of GDP a year over the five years  2012/3 to 2016/7, the overall economy continues to grow at a reasonable rate (+2.5% a year over the period) while the government’s finances move into much better order. Again, we’re fortunate that we’re starting from manageable levels of deficit and manageable levels of government debt: one of the tragedies of the Eurozone ‘austerity’ policies is that, from their much worse starting position,  they can’t pull off the same trick of simultaneously fixing the government’s books and keeping the economy growing.