Some observations about why the Government's budget might be characterised as prudent fiscal policy that is putting downward pressure on inflation (not necessarily all my own views, but I thought I would put the "alternative" perspective nonetheless):
**This Budget will see government outlays fall in real terms – which is the first time since 1988-89 that any government has delivered a cut in real outlays.
**It is wrong to say the upcoming Budget doesn’t matter much for the economy or monetary policy. Recall that Government demand is about 20 to 25% of GDP and the killer line from the RBA Statement from that perspective is:
“Public investment has been falling as fiscal stimulus projects ... are completed. More broadly, with the budget projected to return to surplus over the next few years, the impact of fiscal policy will be contractionary.”
**With around one-quarter of GDP “contracting”, it is the other 75% of the economy that is overheating and forcing the RBA's hand. It is private demand that is the driving the RBA thinking and fiscal policy could be said to be helping to dampen inflation by contracting. Of course, the question is, Is it contracting enough?
**If you split Private Demand and Government Demand in the National Accounts and have a look at economist forecasts, you will see private demand is likely to grow about 5 to 6% in real terms in the next couple of years (that’s arguably overheating) with public demand flat or even falling (some people might say that’s a public demand recession!). This of course means bottom line GDP about 4% plus or minus a bit.
