While I cannot say who he is, an extremely well-connected and highly respected Government 'insider', who is also a leading economist, has sent me the following response to the Budget commentary, which I thought was worth sharing here (the "Ed" bits are my comments):
"Some commentators are very critical of the Budget with the focus of the attack being that it will not stop the RBA from hiking rates in the months ahead.
This sort of analysis misses several points about the nature of fiscal policy, perhaps because many of those delivering such criticisms have never been involved in framing a budget or they have a dreadfully misplaced idea that everything the government does should be directed at putting downward pressure on interest rates.
The objective of fiscal policy is not to hit some pre-determined level for the cash rate. To say the Budget will not stop a near-term rate hike, which is what many claim, is about as dumb as saying the Budget will not stop it raining tomorrow!
It’s not meant to.
And by the way, many of those so confidently predicting the near-term rate hikes were also looking at hikes in February, or March, or April...None of which were delivered, of course.
[Ed: Yes, but there was the small matter of the Queensland, NSW and Victorian floods, the rolling Middle East catastrophes and consequent financial market shocks, the Japanese earthquake-cum-tsunami-cum nuclear crisis, and the New Zealand earthquake, to name just a few speed bumps. In the absence of the floods, the Middle East and Japan, the RBA would likely have hiked by now given 1.2% GDP growth in Q4 (ex floods) and similarly strong expectations in 2011.]
To be sure, there is some medium link between fiscal and monetary policy in terms of their impact on activity, jobs and therefore inflation – as we saw before, during and now post GFC.
Let’s have a look at the key macro points in the Budget.
Real government outlays growth will be 0.5% in 2011-12, the weakest result in 23 years, and -0.1% in 2012-13, which is the first fall in 24 years. (Note Budget Statement 10, Table 1).
OK – this comes after the GFC stimulus, so maybe the base level was high.
Spending to GDP ratio falls to 23.9% in 2012-13, which is about the average of the last 15 years. And between 2010-11 and 2012-13, the Budget bottom line swings massively – by 3.8% of GDP – the most rapid 2 year turn in the budget balance on record.
Finally, listen to the RBA and what it is thinking now. From the 6 May SOMP:
“More broadly, with the budget projected to return to surplus over the next few years, the impact of fiscal policy will be contractionary.”
See Chart 8 of Budget Statement 2.
In the months ahead, we’ll see what the RBA does with rates – who knows. But if it does hike, it will not be because of fiscal policy – it will actually be quietly thanking the government for doing its bit on fiscal policy to lessen the urgency and extent of any policy tightening."
