"It’s budget day tomorrow, so we’re going to hear a lot of tosh. To help guide the way, I thought I’d set out some facts.
It is inevitable that this will be sold as an inflation busting budget. The ALP has an interest rate problem so they will sell the budget as doing something about the economy’s inflation problem – this way, they can show that they are doing something about your looming interest rate problem (and so do something for their looming political problem)...
First of all — the most straightforward metric (the change in the fiscal balance as a % of GDP) shows that the federal government’s fiscal stance has been adding to the inflation problem – relative to the 2010/11 budget forecasts – and my personal forecast for 2011/12 suggests that the budget position will also be more stimulatory in 2011/12 than previously expected.
The change in the fiscal impulse between budget 2010/11 and budget 2011/12 is set out in the above chart. As you can see, the fiscal stance is more stimulatory than previously expected this year and next, and less stimulatory in 2012/13.
To be clear here, the problem is not that GDP is smaller – nominal GDP is likely larger due to the higher terms of trade – it’s that unexpected weakness in tax collection has meant that fiscal drag is less than expected. Another way of saying this is that the government is not taking as much money out of the economy (because they underestimated depreciation and capital loss allowances) so ordinary folks have more money to spend. It’s like a little (accidental) tax cut!
But it’s not all revenue — expenses look like coming in too high, in addition to the too low revenue. We have the monthly returns to March, and the rolling twelve month sum of expenses comes to 353bn just now, while revenue comes in at 299bn. I am tipping a deficit of around 52bn in 10/11, and a little better than half that in 2011/12...
And, of course, Government spending causes inflation – because the government is not a price or quality sensitive buyer. Public servants care less than the average person does about value for money – as only a tiny fraction of what a public servant spends it is their own money … thus, government spending drives up prices for everyone."
