Wednesday, 19 June 2019

Are we ready?

The Budget came and went while I was overseas, and I've been catching up with the news and the coverage.

It's not surprising that a lot of the media and analyst attention was focused on the 'wellbeing' perspective: it's getting attention overseas, too, as in this thoughtful piece in the Financial Times ($?). It's equally unsurprising, though, that virtually nobody (as usual) has asked the simple Keynesian question, is the Budget expansionary or contractionary? Do its direct effects on government spending and taxation boost or brake the economy?

Here, buried (as usual) on page 15 of the 'Additional info', is Treasury's best guess at the answer. The 'fiscal impulse' is the effect of policy changes on aggregate demand, allowing for anything cyclical that might also be affecting tax revenues and government spending. A positive impulse is expansionary, and you can see that fiscal policy has been giving a decent 1%-of-GDP-ish boost to the economy in the June year just finishing. It's not doing a lot either way in the next couple of years, and then if policies stay as they are, it starts to modestly brake the economy over 2021-2 and 2022-3.


The last time we saw these calculations was at last December's 'Half Year Economic and Fiscal Update', or HYEFU, when they looked like this (I wrote about them here).


From a fiscal policy cycle-management point of view, the new profile makes a good deal more sense than the old one. In the old one, there was a stonking 2%-of-GDP fiscal boost in the 2018-19 year, when the economy didn't need it, nor was there any obvious reason why the brakes should have gone on immediately afterwards. The new pattern is rather more sensible: there's less of a pro-cyclical boost in this June year, and the brakes aren't getting applied in the coming June year.

It would be nice to think that this was a deliberate adjustment of fiscal policy to make it more attuned with the cycle, but it looks more happenstance than design. While there is a bit of extra spending in 2019-20 that helps draws the sting of the previously planned braking, otherwise it seems to be down to timing differences: spending didn't happen to the original timetable. Or as the official explanation puts it
The 2018/19 impulse is now estimated to be 1.1% of GDP compared with 2.2% forecast at the Half Year Update. This reflects changes in the expected timing of operating and capital spending. Some operating spending previously expected to take place in 2018/19 is now expected in 2019/20. Changes in the timing of spending and higher allowances announced at Budget 2019 see a broadly neutral impulse in 2019/20 compared with a -0.9% of GDP impulse forecast at the Half Year Update.
That's all understandable: we're all human, things always don't go like clockwork, and the incoming Coalition government didn't exactly have a fully worked-out policy programme when it first took the reins, so some slippage isn't a huge surprise.

But if you get biggish changes in the stance of fiscal policy happening by administrative accident rather than for proactive cycle-management reasons,  it does make you wonder how effective fiscal policy can be in dealing with cyclical ups and downs. You might well want to slow things down, for example, only to find the economy gets an unwanted boost from spending programmes kicking in late, or conversely find that planned fiscal boosts get undermined by slower than expected spending.

With monetary policy creeping ever closer to its practical limits, especially after the latest interest rate cuts in Australia and New Zealand, fiscal policy is necessarily going to have to do more of the heavy lifting to manage the business cycle in the next downturn, which may not be too far away if the Trump administration continues in brinkmanship mode.

As it stands, however, fiscal policy is vulnerable to large ebbs and flows that can dwarf any attempt at fiscal cycle control. We need to be able to do something more effective when - not if - the next downturn turns up. Ideally, 'shovel ready' infrastructure spending programmes that could be rolled out quickly would do the trick, but while they're not impossible to organise they're not a doddle either. An alternative would be quicker-to-work defibrillator fixes like "put $500 in every beneficiary's bank account", which we've shown we can organise (recall the recent winter heating top-ups to national super, for example).

I'd like to think there's someone in Treasury primed and ready to pull the Emergency Fiscal Boost lever. Am I wrong?

1 comment:

  1. It would make a pile of sense to have a lot of infrastructure projects in the pipeline, consented, and ready to go when/if the boil ever otherwise comes off the construction sector.

    But I just don't get the continued push by a couple of journalists to take on more debt seemingly just for the sake of it. If there's no output gap and there's possibly some overheating, it's not like a fiscal push would be pulling idle resources into production.

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