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Budget 2009

This Budget is based on forecasts that unemployment would have grown  considerably without future strong fiscal stimuli but that the economy will, in fact, turn around rapidly in 2011 and then grow at 4.5%.   The debt that does stem from the Budget is significant but not overwhelming and probably unavoidable if one accepts the budget premises.  The criticism that strong moves were not taken now to reduce the deficit are inconsistent with the premise that a further expansion of the economy now is warranted.

I don’t have much of a clue what will happen to the economy over the next 2-3 years and I cannot believe, on the basis of its recent unemployment forecasts, that the Treasury does either.  The real risk is that the Budget is based on over-optimistic forecasts of local and international economic recovery.

This is risky because, at core, Australia’s current economic woes are due to a terms-of-trade shock which slashed the value of our exports. Apart from a decline in share market values we have not had major financial woes.  Longer-term, stimulating the economy will not reverse this fact of life – we are poorer because the rest-of-the-world values our products less.

Longer-term too, unless the world economy recovers strongly, we must accept that we will need to live at lower living standards.  Fiscal actions to try to thwart this decline will only create debt.  The current stimulus can offset the immediate multiplier effects of the decline in export values but problems start if there are persisting delays in the world economic recovery.  Then government will need to raise taxes and cut spending to prevent a debt explosion at precisely the time voices will be calling for further economic stimulation.

The politics are interesting. The Labor Party will become identified in the media as the ‘high debt’ party. If the economy begins to recover in 2010/11 this won’t matter much.  But if the recovery is slower than expected then either the debt/deficits will blow out further or the government will need to savagely cut middle class welfare that was so readily disbursed in the Howard years.  It will then, at best, become a two-term government. Indeed it may have to cut into this welfare heavily even if growth is moderate if long term debt increases if it is not to be seen as an ineffectual government which made things worse.

5 comments to Budget 2009

  • […] prolonged than Treasury are predicting. Can we afford to do all of this right now?”  (see Harry Clarke for more pointers). I think we do need to spend that much but I am open to debate on this. Give us […]

  • Uncle Milton

    Harry, you are assuming that the terms of trade shock is permanent. A more optimistic view is that the China growth story will resume fairly soon. They still have another 500 million peasants to urbanise. That is going to take a lot of coal and iron ore and inevitably their prices will shoot skywards again.

    (Though how a resumption of the China mega industrialisation story is consistent with keeping greenhouse gases under control is anyone’s guess.)

    What the budget does show is the futility of using infrastructure projects as a tool of macroeconomic stabilisation. Worthy as they may be in their own right, by the time they are up and running the recession will be long gone. The government was quite correct to use cash grants as a stabilising measure.

  • hc

    Uncle Milton, I did write of assumptions about recovery in the international economy and these will be terms-of -trade improvements.

    I am unconvinced that these will be as great as those experienced in the past and very concerned about the pace of their arrival. Supply effects will moderate price increases and we are assuming that tentative signs of recovery in the Chinese economy will be sustained. I hope they are.

    The assumption in the budget is that recovery will be quick. If it isn’t the budget strategy will come under pressure.

  • Uncle Milton

    Harry, you might be right, but every recession feels like it will never end. They always do.

  • Ros

    Harry do you have any views on the psychological effects of, or can you direct to any others who might, the budget changes to super and changing the right to access a pension. That is on the decisions that older Australians might make about their participation in the workforce or how they behave within the paid workforce. A skim of the Treaury review gives no indication that there was any consideration of the possible impacts on the choices that Australians would make in light of their suggested changes.

    Instapundit directs towards some interesting thoughts on the “galt effect” of Obama’s attacks on those middle class/professionals/selfemployed and how hard they are prepared to work now.

    “The doctors, lawyers, engineers, executives, serious small-business owners, top salespeople, and other professionals and entrepreneurs who make this country run work considerably harder than pretty much anyone else (including most of the chattering class, and all politicians). They are not robber barons, or trust-fund babies, or plutocrats, or even celebrities…..More problematically, he is penalizing their success and giving them very clear incentives to ratchet back on productivity. ”

    My husband and my son-in-law and daughter have considered why they should work as hard as they do. I am sure there are many more.