May 7, 2012
So the Reserve Bank reduces interest rates last week, while a week later, fiscal policy is set to be tightened in an attempt to bring in a budget surplus. That are two policy arms working at cross purposes. The implication of the former is that because the economy is sluggish, the RBA has cut rates to provide a stimulus.
The budget surplus, on the other hand, is contractory in that the fiscal austerity weakens the economy slows economic growth and increases the potential rising unemployment. That would mean the RBA would have to reduce interest rates even further to compensate for a slowing economy.
If the economics doesn't make sense the politics does. The Gillard Government is in such a weakened position that it is forced to prove its credentials as good economic managers. The underlying current is that the Gillard Government can’t be trusted to use our money appropriately and so we should be giving them less of it. The best way to do this is to end the waste and curtail government spending.The rhetoric here is one of 'bloated' or 'inefficient' public services.
Deficits generate debt and the optimum amount of public debt is zero is the position of corner-shop economics or household budget economics. Therefore achieving a surplus or balance the budget is taken as a measure of fiscal responsibility. This is cast in stone, and holds even when Australia doesn't have a fiscal sustainability problem, and that the scenario is one in which fiscal policy will make economic slowdowns even more severe.
The politics of budget surplus in a period of economic slowdown is a political goal with no economic rationale. Will the politics work for the Gillard Government? Or will they be accused in The Australian of fooling around with dodgy figures, constructing surplus mirages and playing around with smoke and mirrors?