Some analysis

Here is Pundit Grattan thinking aloud about government spending.  

Meanwhile, it is a bit rash, with revenue uncertain, to be talking up expectations on spending, as Rudd did this week when he said it was time to “bite the bullet” on a paid maternity scheme, “and we intend to do so”. He did not commit to a scheme in the next budget but people could be forgiven for thinking he did, given the urgency of his language.

On the other hand, if the economy slumps further than expected, some pump priming would be needed. In that case, the Government’s virtual promise to increase pensions in the 2009 budget would be economically felicitous. Pensioners spend rather than save what they get and virtually all the money would go quickly into stimulating the economy.

Here’s the logic.  

  • Revenue is ‘uncertain’
  • The concern is that revenue will fall (this will happen “if the economy slumps further than expected”).  
  • If it does fall, then having spent government money on maternity leave will be seen to have been ‘a bit rash’. 
  • “If the economy slumps further than expected” then spending money (in this case via increasing pensions in 2009) would be economically felicitious.

So there you have it. Like she said, ‘on the other hand’. 

And here’s a prediction.  If the economy does turn down, the Opposition will be cockahoop about how the surplus is falling, and how the Budget forecasts are not being met, and so there’ll be pressure to prune back budgets to minimise damage to the bottom line. This will be ‘economically infelicitous’.  It will harm the economy because it will make the downturn worse.  But we will be told that – even though we’ve sensibly posted tens of billions of dollars in surpluses (it’s a great pity it wasn’t a lot more but that’s old news) – that we have no choice.  Why? Because letting the budget bottom line suffer might be good for the economy, but it could look – well – it could look rash couldn’t it?

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13 years ago

I’m not great on economics but I would have thought that paid maternity leave was considered stimulatory also, and thus would also magically become ‘economically felicitious’? After all it should encourage job growth, to a degree, by adding some certainty around female candidates and eventual pregnancies. Also I can assure Pundit Grattan (brilliant moniker) that people having babies certainly spend a lot!

I can also assure her that a lot of pensioners do save, but maybe that’s a different question and maybe my samples are insufficiently representative.

13 years ago

I’m curious about the idea that people who save money aren’t stimulating the economy also: surely if you put your savings in a bank, that bank then has more capital with which to fund business loans that are needed to expand the economy’s productive capacity? And indeed, given my admittedly hazy understanding of the rules of fractional reserve banking, several million dollars going into savings has the potential to generate several 10s of millions of dollars worth of business loans, does it not?
I’m guessing what people mean by “stimulating the economy” is “ensuring consuming spending stays high enough to keep it afloat in the near term”.

13 years ago

It was amusing to hear Rudd talk about its being time to “bite the bullet” before apparently going on to qualify it. In Sir Humphrey’s terms it would have been “in the fullness of time”, “after due consideration”, “taking all other factors into account”, “should conditions prove sufficiently favorable” and obviously after enough time has elapsed for it to filter to the bottom of the pile (or be lost in a flood or a fire). Or until just before the next election. Meanwhile they will apparently place the bullet in boiling water and wait until it becomes soft enough to chew.