My mate the ('faceless') interest rate strategist responds to my mate the--equally 'faceless'-- Government insider's critique of economist reactions to yesterday's Budget being too neutral for the latter's liking. A few excerpts enclosed here with the rest found at this link:
"A fair criticism of how I have framed my discussion of the budget is that the objective of fiscal policy in not to stabilize nominal interest rates [Ed: The Government insider's argument]. I totally agree. The reason I framed the discussion in these terms was because I anticipated that the Government would attempt to put this spin on a weak budget that did no such thing. I think I was right in this assessment.
The appropriate objective of fiscal policy is to increase economic welfare. It does this by taxing money or borrowing money – and either investing, spending it directly, or transferring it to others to invest /spend...
What should a prudent person do with a windfall gain? They should spend a bit of it and save most of it – and that is exactly what the government should do. So when you have a once in 150yr terms of trade boom, expenditure as a proportion of GDP ought to fall.
Yet, what is happening is this — at the peak of the boom, following the best three years of nominal revenue growth in the low inflation period, government spending as a proportion of GDP falls to 23.9% of GDP … About the average of the last 15yrs, and about 1ppt higher than in 2007/8, before the GFC ‘stimulus’ began...
Things brings us to the second point that can be usefully made within the confines of this top down approach — that aggressive stabilization policy by the fiscal authority requires a period of ‘loading up’ prior to the crisis, so they there is some ammo to unload when the big grizzly bear arrives.
What better time to reload than in a full employment economy, enjoying the highest terms of trade and biggest mining investment boom in 150yrs, accompanied by the strongest revenue growth in the modern period...
Apart from all this economic stuff, it also would have been good politics — the government has backed down from too many fights, and lacks authority as a result. They need to pick a fight and win it. Winning a tough decision, and potentially earning the upside of a delayed rate hike might have given their awful polling a boost.
Thus, I conclude that this is a lost opportunity for all of us!"
