Why this could be the summer Joe Hockey turns Keynesian.

Next year’s budget offers the Government a horrible array of choices.

The government was badly burned by this year’s budget. Ideas like the GP co-payment saw their popularity plunge in May, and they’ve been in an election-losing position since.

polls
Source: the inestimable Edmund Tadros, AFR.

They burned their fingers badly, and what’s worse, didn’t even grab substantial fiscal gain from it. The Treasurer’s office is staring down the barrel of a budget with another big deficit next year.

If they try to push the budget back to surplus, the public will have their worst fears confirmed – these guys really are mean!

So the Treasurer can’t cut too hard.

The alternative – running a deficit and being proud of it – looks unpalatable. But there are ways to change one’s tastes …

Australia’s growth in the last quarter was poor, falling to 0.3 per cent.

gdp grwoth
Source: ABS National Accounts

There is a big school of thought in economics that says when growth is poor, governments should spend to prop it up. This is broadly known as Keynesianism, named for John Maynard Keynes, who was a major theorist of the great depression. The more contemporary theorists are known as New Keynesians

Spending to support growth is common. That’s what Kevin Rudd and Wayne Swan did in the GFC, giving us school halls, insulation and $900 cheques. The Rudd stimulus left Australia with a medium-sized amount of debt, and arguably prevented Australia from falling into recession alongside the rest of the western world.

The opponents of this policy included one of the national daily papers, The Australian. They hated it in 2009, and they hated it even more by 2013 and 2014.

But by 2015, might their rigidities soften? The political needs of the current government may demand it. The only way to not commit political hara-kiri while setting a framework for the 2015-16 Budget will be to adopt a far more generous way of thinking.

Torn between two forms of cognitive dissonance, “I am setting the national Budget in a wholly political way” and “I am a late convert to the need to support aggregate demand,” I suspect Mr Hockey may be tempted by the latter.

This summer, as he lies on his towel, listening to the Pacific Ocean waves crash on the beach, Joe Hockey may well be turning the pages on a biography of Keynes. Perhaps the same one Mr Rudd read in 2009. It might be the thing that saves him.

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thomasthethinkengine

Thomas the Think Engine is the blog of a trained economist. It comes to you from Melbourne Australia.

4 thoughts on “Why this could be the summer Joe Hockey turns Keynesian.”

  1. There is a way for Mr Hockey to achieve both budgetary and economic goals, but I suspect he is not the man to pursue it. The answer is in wealth redistribution. By closing the tax loop holes that benefit the rich (and their investments), then redistributing that to the young and the poor, you can boost economic activity without affecting the overall bottom line. Lower income earners have much more unmet needs and are more likely to quickly spend any extra cash, than a rich person, or someone in or approaching retirement, who will be more likely to save or invest it. Economic activity is based on spending. Money can be used many times and many people can benefit for each transaction. The trouble occurs when people stop spending, economic growth slows. If these arguments held, then wealth redistribution wouldn’t be all that bad for the rich, as economic growth would return and their investments would increase in value. I call it the trickle up effect.

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    1. Supporting arguments from Ross Gittins: “There’s all the orthodoxy-busting research – now coming even from the official international economic agencies – finding that that income inequality acts as a drag on economic growth. Did the government know – or did anyone warn it – that by preferring budget cuts biased against the bottom half it could be hindering its professed goal of faster growth?.”
      http://www.theage.com.au/comment/has-the-lucky-country-lost-its-ardour-and-ambition-20141216-12828s.html

      and Peter Martin: “What he needs instead is one really big tax hike (spending cuts won’t raise enough), but one won’t rip money out of wallets and purses. It needs to be easy to justify (attractive to Labor), invisible on a day-to-day basis, and simple. And it needs to raise, say, $12 billion. Per year. …What Hockey needs to do is to tax compulsory superannuation contributions as income, which is what they are. At the moment after the employer pays them they are taxed from the fund at 15 per cent, which is a very good deal if you are on a marginal tax of 37 per cent, quite a good deal if your rate is 19 per cent, and an appalling deal if you earn so little your tax rate is zero.”
      http://www.theage.com.au/federal-politics/political-opinion/advice-for-hockey-sting-super-and-fix-the-budget-in-one-hit-20141215-1272tu.html

      Liked by 1 person

      1. Next year’s budget is going to be fascinating. Economics is all about choices, and Mr Hockey is going to have to give up something he loves. Government, his economic philosophy, or his voting base. If he manages it wrong he can lose all three…

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  2. Listening to last week interviews of the Treasurer and the Finance minister to defend / justifiy the budget deficit and the measures (cut spending), I was quite shocked by their repeated statement.

    The statement was in essence: “Even though the public doesn’t want it / like it / understand it we need to do what’s best. We put in jeopardy our reelection by doing the best for the country.”

    As if to say the people don’t want the best for their country, we no longer represent the people. What we are doing is against public opinion therefore it’s has to be good.

    Weird way to justify a set of measures. And weird way to show self-belief. If it is the best solution they should not be worried about doing a sacrifice and risking not beeing reelected.

    That’s showing a very low estime on democracy.

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