Cyclical course-setting? Pretty good

Does the Budget set a sustainable course? Is it appropriately boosting or braking the economy? Short answer to both: yes.

Here's the 'true' or 'underlying' state of the Government's finances (from pp34-35 of today's Budget Economic and Fiscal Update) which uses the methodology I talked about the other day. The solid blue line shows the headline deficit, and the green line shows the underlying position when the headline figure is adjusted for the state of the economy. The thing to keep a watch on is the track of the underlying cyclically-adjusted balance, and from a sustainability point of view it is tracking as it should. It's gradually moving back towards balance, which is a good thing to do over the longer haul, but not disruptively quickly, which is the right thing to do in the still-unsettled short term.

The government is running ongoing deficits (cyclical and structural), so over the forecast period it is supportive all the way (it's adding more to the economy than it's taking out). But it's also useful to look at whether it's becoming more supportive, or less. That's estimated by the 'fiscal impulse', the change in the underlying cyclically-adjusted position from one year to the next (shown below).

This looks pretty reasonable, too. There was an appropriately huge increase in fiscal support in the June '20 year, to the tune of just over 6% of GDP. The degree of support is being eased back a bit in the current June '21 year, and that makes sense, as the Covid downturn wasn't as bad or as long as expected, and the rebound has been faster and stronger than first thought. 

You could make a case that the forecast increase in fiscal support in the June '22 year isn't necessary from a cyclical point of view: we're looking at a period of expected GDP growth of 2.9% (current '20-'21 year), 3.2% ('21-'22), and 4.4% ('22-'23) which doesn't add up to the strongest case for revving up the degree of fiscal stimulus. 

On the other hand, the unemployment rate at June '22 is expected to be 5.0%, and there is an argument (explicitly made by the Aussie Treasurer Josh Frydenberg in his Budget earlier this month) that you should keep the fiscal pedal to the metal until the unemployment rate has a 4 at the front. So no biggie either way, and at least the years beyond '21-'22 show an appropriate ongoing unwinding of the Covid-era fiscal stance.

In terms of setting the best fiscal course, on the left lay the lure of buying everything in the toyshop, on the right an "I'm more fiscally responsible than you" austerely fast return to surplus. This Budget has steered pretty well through those extremes.