Saturday, January 31, 2009

Balancing the budget 'over the economic cycle'

Rudd has taken to using this new, cynical and meaningless term as an alternative to sound economic management. It is straight from the New Labour textbook in the UK. Have a look how well it has worked over there.

As Chancellor Gordon Brown was spending big and running budget deficits during the boom times. But fear not, he was determined to balance the budget over the economic cycle - as this BBC article from 2004 points out.

But the great thing about meaningless spin replacing sound economics is that you can just change the length of the economic cycle - as Brown does the following year. In January 2008, before the global credit crisis, Brown looked very much like he had failed to meet his target and debt continued to rise sharply.

When the cycle did end, this is what happened.

The term really does go to the heart of what's wrong with the Rudd Government. Too clever by half, they use terms like 'balance the budget over the economic cycle' and 'temporary deficit' to give the impression of making hard decisions but actually just running a traditional tax and spend administration.

Finally, here is the Government's Finance Minister trying to add some weight to the meaningless and misleading term on Lateline in November last year:


LEIGH SALES: Kevin Rudd was asked in Peru today if he would be prepared to take the budget into deficit in response to the financial crisis and he said, "The clear philosophical position this Government has had since Opposition and since becoming Government is this: that we believe in maintaining a Government and budget surplus over the economic cycle. "What does he mean by economic cycle, what cycle?"

LINDSAY TANNER: Well, a cycle is affected by a variety of things and one of them, of course, which everybody is worried about is international forces. And so our position's pretty straightforward. We've got a projected surplus. It's a bit thinner than it was a few months ago because it's had a very large hole knocked in it by these international factors. But we've still got positive growth projected and we've still got ongoing modest budget surpluses projected.

LEIGH SALES: But the use of the word "cycle" implies some sort of a timeframe? Does he mean over the financial year? Does he mean the electoral cycle? What exactly is he talking about when he says "over the cycle"?

LINDSAY TANNER: It doesn't imply a specific cycle because economic cycles over time vary in the period of time which they relate to. So, all it is is a statement that there are wider economic forces out there that no government can control that can move the fiscal settings around very quickly. We've just seen that happen. We've seen budget surpluses that were projected around the $20 billion mark suddenly knocked down to single figures as a result of particular international forces that are part of an economic cycle. We don't know whether those forces are going to intensify or whether we've seen the worst of them. That's a factor that's clearly has the potential to have an impact on our fiscal settings. But based on our current projections, the best available advice we've got, we believe the budget will stay in surplus and we're committed to keeping it in surplus. But nobody can be certain about where those wider international factors are going to take the Australian economy. If they intensify, if they get a lot worse, then things will change.


Right...

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