Earlier in the week, I raised the question of what might happen to Turnbulls argument if we did a counter-factual calculation – and in particular what might happen to debt levels over the next few years if the Government chose to do nothing (in response to the budget).
Nigel Ray, Executive Director, Fiscal Group of the Treasury, has done something of the sort in his recent paper.
Ray’s piece does not present us with a debt forecast but it does tell us what would happen to household consumption. Retail sales fell by 2% in March. This is taken as proof that the double fiscal stimulus is not working (of course the second round has not been implemented). Yet retail sales have risen by 4.5% ahead of last June, whereas Treasury estimates that, absent the fiscal stimulus, it would have been below June 1998 last year. This is what it says:
There has been some questioning around whether households will spend additional transfer payments or choose to save them in the current environment. This type of argument is relevant to our expectations of the size and timing of the fiscal multiplier. But we should cast the argument in terms of what would have happened in the absence of an increase in transfer payments.
It is plausible that households are directing more of their income to saving or paying down debt in the current environment. This should mean both that they reach their desired level of gearing more quickly and that their confidence about their financial position increases. Either directly, or through balance sheet effects, the transfer payments will have a positive impact on spending.
The Treasurys analysis of the Governments recent policy action indicates that, absent the fiscal stimulus, household consumption would have remained below its level at the middle of last year until late this year. The stimulus is expected to hold household consumption above its level of the middle of last year.
Lower household consumption means higher unemployment and lower retail and transport profits. Thats how it would impact on debt – assuming we have faith in Treasury’s calculations.
Has anyone unearthed a similar document with comparable information?