No, not coming off hiatus, but curious as to what readers think of Cossie’s spend-up. It strikes me that raising thresholds is a good thing, and he’s dipped his toe into the water on vouchers and teachers’ performance pay… but my there’s a lot of pork, too.
And is it enough to save Howard’s bacon come election-time?
Until someone like John Humphreys or Jason gets into the nitty-gritty, a penny for your thoughts, Catallaxians and friends.
Crossposted at Thoughts on Freedom (where some very spiffy blog renovations are underway).
UPDATE: The Budget can be read in full at www.budget.gov.au, or you can read the overview or check the media coverage (Australian, SMH).
150 Comments
Why is all government spending automatically described as pork. Who’s going to build the railways and the highways - the Invisible Hand?
Access Economics describe the tax cuts as inflationary, hard to understand how when they also said that Govt spending was also inflationary.
Ridout from Aust Industry Group said that tax cuts were unlikely to be inflationary as most is used to retire debt.
KOB on 7.30 report had Swan in a dive, he had to admit it was a clever (good) budget and that they would maintain surplus at 1% GDP and also bring in tax cuts, plus broadband!!
In fact he said that Costello had stolen all their good points whilst the ACTU said it was a bad budget as tax cuts woud not help those on low incomes. After 30 secs of Burrows you tend to lose the thread.
Swan said that growth was purely based on resources sector which was denied by everyone else, Kohler said it was across the board esp the banks. Swan is trying the scare tactic about crash of resource sector.
All things considered, it was rather non-eventful. No dramatic tax cuts or major spending items, just a solar panel here, a fighter jet there. Howard and Costello could be spreading themselves too thin, and not getting anyone particularly excited.
But that welfare-to-work elephant in the corner doesn’t seem to be going anywhere, and I’m disappointed no-one wants to take that one on. Admittedly, I say this from a self-interested viewpoint (I’ve an effective marginal tax rate of over 70%), but raising the top bracket seems without fundamental changes at the bottom seems a hollow gesture from a government which claims itself to be a major tax reformer.
Rog
I left this on the open forum. seeing you mentioned the tax cuts/ inflation mantra I move it here.
—–
The ABC, or more accuately two former ALP staffers who moonlight as political and economic affairs reporters on the ABC- Tony Jones and Kerry O’Brien ( the contemptible) O’Brien seems to have given up on pretending he isn’t biased) were tonight touting the view that tax cuts are inflationary. They were ably assisted by this cretin from Access economics who echoed the same sort of nonense.
Anyone who was uncertain that the ABC ought to be privatised or simply handed back to the Unions should be left with no uncertainty tonight.
The broadcasting arm of the Green Party is now touting tax cuts as inlfationary.
Fme. And there are people who say your ABC is on a higher IQ plane than the rest of the TV.
Can it get any worse than this.
That joker from Access economics ought to have his license to practice revoked- if that were at all possible.
JC
Macroeconomists (which is essentially what Access are) still suffer from the vulgar-Keynesian disease.
It really is irritating to hear these macroeconomic forecasters pontificate about public policy, they’re all the same JC. The concept of deadweight losses from taxation and general supply side effects just doesn’t matter or register to them.
So JC and Jason, how do you rate the Budg?
Here is the effect on tax rates:-
http://en.wikipedia.org/wiki/Income_tax_in_Australia#Personal_Income_Tax
The question of the inflationary impact of the government’s budget position is different from the existence of the deadweight loss from taxation or the benefits from government expenditure. An increase in G-T in general amounts to an increase in aggregate demand rehardless of whether it is caused by an increase in G, a decrease in T or both. In a situation where we are at close to full employment, it is quite possible that an increase in G-T might result in an increase inflationary pressures.
The reason an increase In G results in an increase in aggregate demand is clear. It adds directly to demand. The reason a decrease in T is likely to add to aggregate demand is that it is likely to result in an increase in household disposable income. This would add to consumption demand.
So your now saying Damien that inflation is no longer a monetary problem, it is a tax problem.
Wow. Let’s just raise taxes then everytime the CPI goes up. Who needs the RBA to manage monetary policy when all a finance minister has to do is raise taxes to nip inflation in the bud.
No wonder economics is in disrepute.
No mention of course that the RBaAshouldn’t be running a lax monetary policy that is the ONLY one cause of inflation.
No mention of course ( although it is irrelevant) that most of the tax cuts last time round went to repaying debt and savings.
Again, no wonder it is in disrepute.
How strange. I was recently telling you much the same thing in terms of a common currency in Europe.
JC, three points in response to your silly comment at number 10 in this thread . (I am sure there are other points that could be made as well.)
1. Inflation is not always and everywhere a monetary phenomena. Monetary factors are a very important determinant of inflation, but they are not the only one.
2. All else equal, an increase in G-T amounts to an increase in the money supply.
3. Even without a change in tax scales, inflation is likely to lead to increased tax revenues (T). Inflation is an ancrease in the general level of prices. Output price inflation is likely to result in an increase in GST revenues. If the output price inflation results in input price inflation, it will lead to an increase in income tax revenue through bracket creep.
The value of a nations currency is determined by two factors and two factors only. Ready now. The two factors are:-
1. Supply.
2. Demand.
Tax cuts provide a greater incentive for trade (ie they are a trade barrier reduction). Any increase in trade will necessitate the use of more currency (ie medium of exchange). So it will increase the demand side of the currency equation.
Tax cuts are deflationary. Always have been always will be. Of course other demand factors and certainly supply factors can counter act the effect but all things being equal tax cuts are deflationary.
Regards,
Terje.
Damien
My silly response was a response to your even sillier comment that proves to anyone with a modicum of understanding that the economics profession is fucked up these days in a big way. Your comment, I am afraid, is a great example of what I mean.
Tax cuts cannot be inflationary by any definition other than the vulgarities of Keynesian economics. It was this fundamental misunderstanding that led us to the monetary disaster of the 70’s when “demand management†was supposed to mop up “excess liquidityâ€. Meanwhile the central banks were doing a fine old job of running the printing presses 24/7 seeing inflation had been redefined as a fiscal issue needing a fiscal response.
Two other comments:
1. The economy is growing at around 3%. Ex out mining, which to a large extent is a China and India story- the economy is hardly kicking arse. The US was growing at 5% in the 90’s without any major kick to the CPI.
2. Why didn’t inflation tame itself when we were running tax rates of up to 70%.
Get this right for once Damien. Inflation is a monetary problem. So stop confusing people by adding Keynesian junk and passing it off as economics.
Terje, all else equal, why will a tax cut result in deflation? If you think about it in a very simple ISLM macro model, it will either have no impact on the price level (if the economy is at less than full employment) or it will be inflationary (if the economy is at full employment). If the economy starts at less than full employment and the tax cuts do not move it to a position of full employment, then there is no change in the price level. If the economy starts off at full employment, then the economy will be still be at full employment after the tax cut. In this case, the demand expansion results in an increase in the price level. If the economy starts at less than full employment but moves to a position of full employment after the tax cut, then the price level will probably rise, although it is possible that it might remain the same. In none of these cases will the price level fall following a tax cut.
1. Since when has 4% unemployment defined as full employment, Damien?
2. It returns the money to the rightful owners, as it was taken from them without a contractual agreement in the first place.
3. It reduces the propensity towards more government spending.
4. Even if the the tax cut is spent and prices do up up….. Why is a price signal showing an increase in demand for goods a sign of inflation? This means that you consider the price signal to be a no longer what it is used for, but simply a sign of inflation. This is a barking mad statement to make.
Jc you are not making any sense. We are not talking about relative price changes here but an increase in the general level of prices. By definition, inflation is an increase in the general level of prices.
Should read prices of some goods go up.
Inflation is not an increase in the general price level at all.
Infaltion is expressed as an increase in the general price level as a result of an increase in the money supply- M1.
Simply watching the CPI tells you juack shit about inflation if we think about it correctly.
We can have an increasde in the price of oil - energy- that eventually expresses itself through the CPI. That’s not inflation. In fact it is disinflationary as its consequence is a fall in the standard of living.
JC, inflation is, by definition, an increase in the general level of prices. There are no ifs, buts or maybes about this.
If the state doesn’t print money, and it gives money through tax cuts to to the taxpayers, then the money supply has not increased. If demand for money increases without an increase in supply, then the value of the money decreases and tax cuts are deflationary. Even an engineer like me can understand that much.
Brendan, if the government does not decrease G then where does the money to fund the tax cuts come from?
By the waqy, the price of money is not the price level. It is the nominal interest rate.
The government has three sources of money:
- taxation
- debt
- printing press
If taxation returns are increasing faster than government spending is increasing, then the government can still make tax cuts and increase spending without resorting to debt or the printing press. Tax revenue is still more than spending (1% budget surplus expected). This is what Howard and Costello have been doing for the past two budgets.
Brendan, I explicitly noted that I was talking about a ceteris paribus change in tax rates, not a combination of fiscal and policy. Sterilisation of the monetary impact of an increase in G-T involves monetarey policy. After all, sales of government bonds by the RBA will affect the interest rate (since bond prices are negatively related to the nominal interest rate).
We do not know whether the tax cuts will be inflationary or not. But unless there is something else that offsets the impact of the tax cut, the impact of a tax cut will either have no impact on inflation or it will tend to increase it.
The first sentence in my previous comment should read “— fiscal and monetary policy”.
Brendan, we are comparing two scenarios. The first does not have the tax cuts. The second has the tax cuts. The question is, will the tax cuts tend to result in increased inflationary pressures, ceteris paribus? Unless you believe that the tax cuts are going to increase tax revenues compared to the scenario without them, then you still have a more expansionary fiscal policy on the part of the government. Unless you are one of those foolish people who mistakenly believe that we are on the wrong side of the Laffer curve?
My thoughts on the budget should come out on Crikey later today. Brief thoughts:
Voucher is good politics and good economics. Long overdue and the thin end of the wedge. Over time we’ll see the idea expanding.
The rest of the budget is a variation on a theme and a missed oppourtunity to reform our tax system.
That was my impression too, Sinkers. I’ll check the Crikey stuff out when it lands in my in-tray and flag your ideas on the thread. I don’t think the budget will be inflationary, and the threshold shifting was good. Just a pity nothing was done to the lowest threashold. It really is obscene that tax starts kicking in at $6000.
ahem, please forward it to me too.
Ohh, okay. Will do. It usually arrives mid-afternoon around these parts.
Thank you. It’s a bit naughty I know, but they don’t send copy to contributors. So you never get to see the final product.
Interesting. Contributors traditionally receive author copies in the magazine trade, but not in newspapers.
Newspapers not really a problem - you can always pick one up for a nominal fee, or check it out in the library.
Damien,
Interest is the price of credit not the price of money. The price of money is the things that must be exchanged in order to procure money. In simplistic terms the price of money is that basket of goods required to acquire a dollar.
Given a fixed amount of money (unrealistic but a necessary presumption if all else is by definition to be equal) then a tax cut will increase the demand for money because there is added transaction incentive and higher turnover.
This not just a theoretical notion either. Inflation (CPI rate of increase) slowed on Reagans watch despite continued growth in the money supply. Of course if the tax cut is so appealing that you get a flow in of foreign capital that is then monetised you may get an alternate result but all things remaining equal tax cuts will increase the transaction rate, lift the value of money and hence be deflationary.
What we can say is that tax cuts that leave a budget in deficit (ie overspending) will increase the price of credit. Logically so because the deficit must be funded by borrowing and any additional such demand for credit would be expected to lift the price of credit (interest rates).
Regards,
Terje.
Lets see, tax cuts are inflationary so increasing tax thru bracket creep is deflationary thereby negating inflationary trend of bracket creep.
Nah
Sensible analysis from Alex Robson on tax cuts.
Damien
Why isn’t inflation a purely monetary phenomenon?
If the problem is that some parts of the economy are far from workably competitive then this is best addressed by microeconomic reform. Inflation then should be purely a matter for monetary policy.
Policy instruments should ideally specialise in what they do best. There are also public choice reasons for returning as much taxes to the people as possible if they are not being spent on necessary infrastructure.
I just detest this macro view of the world - it doesn’t even make sense on a micro level. If something doesn’t make sense or can’t be explained on a micro level it isn’t economics as far as I’m concerned.
I like (not) the line, “how will govts fund tax cuts?”
Govt is not an industry, they are not there to conduct business.
It should be, “how can taxpayers fund govt spending?.”
Proper budget post at the top of the blog, people.
Damien - this makes sense:
A tax cut does what to the production fucntion?
Y = f(L,K,A,T…)
How can it ever be inflationary?
“JC, inflation is, by definition, an increase in the general level of prices. There are no ifs, buts or maybes about this. ”
So is a CPI increase inflation? Yes or no?
Let me remind you that we’re still on this subject becasue you think tax cuts are infaltionary. That’s possibly the whackiest idea I have hard for some time.
Mark
How do remember all these equations! I forgot them as soon as the test was over.
1. I’m no economist or economics expert
2. Tax cuts have been offered the last few budgets and every time inflation went up. Whether that’s coincidental or not is open to speculation.
3. Tax cuts suggest more in the people’s pockets, indicates more they spend because people like to keep up with the Joneses - that sounds inflationary to me.
4. According to some here, that’s only if they chase too few goods, given all the cheap imports we have these days there can nearly never be a shortage of goods and thus we could never have inflation from tax cuts.
4.5 I always thought tax cuts were supposed to be funded by government curbing its spending but that doesn’t take into account irrational human behaviour in 4. as far as I can see.
5. Therefore we can conclude we absolutely do not know whether tax cuts are inflationary or not.
How can tax cuts be inflationary but government spending not?
This debate is absurd.
Mark, inflation is an increase in the general level of prices. As such, it is determined by the interaction of aggregate demand and aggregate supply. The production function affects AS. When we are at full employment, it is vertical. At that point any increase in AD will simply induce an increase in the price level. This stuff is all covered in Eco 1.
John, where has anyone said that government spending is not inflationary? When an economy is at full employment, government spending is inflationary.
If the economy is not at full employment, then an increase in G might not be inflationary. But it wont be deflationary. The crowding out affect is only partial. As such an increase in G, ceteris paribus, increases aggregate demand. The price level either stays the same or increases.
No, the interactin of supply and demand determine the “real price” (the price in terms of other goods sacrificed), not the nominal price.
Inflation is the increase in the nominal price.
But for the same reason Mark was wrong to cite the production function, as it is also concerned only with the real economy.
The nominal price goes up when you have more money chasing the same number of goods.
Tax cuts do not create “more money” than a non-tax cut situation because if the money wasn’t introduced to the economy via tax cuts it would be introduced via government spending or government investing (ie surpluses).
1. How can these tax cuts be inflationary when at best they cover bracket creep caused by years of deliberate excess money growth?
2. Damien, you saying that the production function is wrong. Would you like to explain why it is wrong? Tax cuts increase the factors of production and real incomes rise. Would you like to disprove this?
2. Tax cuts have been offered the last few budgets and every time inflation went up. Whether that’s coincidental or not is open to speculation.
It can be open to speculation, but it’s wrong. There is nothing in economics that could lead one to think tax cuts are inflationary.
Inflation is pure and simply a monetary problem that can be laid at the door of the central bank. Anyone who says tax cuts are inflationary is a quack. Period.
3. Tax cuts suggest more in the people’s pockets, indicates more they spend because people like to keep up with the Joneses - that sounds inflationary to me.
How about tax cuts fueling savings. Savings fuel investment. investment fuels capital expenditure. Capital expenditure raises the capital/labor ratio. This raises living standards.
4. According to some here, that’s only if they chase too few goods, given all the cheap imports we have these days there can nearly never be a shortage of goods and thus we could never have inflation from tax cuts.
Inflation is a monetary problem. Anyone who says otherwisedoesn’t know economics , was badly taught the subject or is a quack.
4.5 I always thought tax cuts were supposed to be funded by government curbing its spending but that doesn’t take into account irrational human behaviour in 4. as far as I can see.
Why is spending irrational? If it is your money- do what you want. Tax cuts don’t have to be funded by a reduction in government spending if there is a surplus. By definition a surplus is excess receipts by the government which they don’t need..
5. Therefore we can conclude we absolutely do not know whether tax cuts are inflationary or not.
Yes we can. Tax do not cause inflation. Only quacks would think so.
“But for the same reason Mark was wrong to cite the production function, as it is also concerned only with the real economy.”
“Tax cuts do not create “more money†than a non-tax cut situation because if the money wasn’t introduced to the economy via tax cuts it would be introduced via government spending or government investing (ie surpluses).”
Umm?
Anyway. The tax cuts/inflation idea assumes a surplus. How can a future cut in taxes (e.g, 2007-2008) be inflationary?
Jason, if you read my first comment on this thread (comment number 9) you will see that I differentiated between the DWL of taxation and benefits of government spending and the inflationary impact of an increase in G-T. Just because something might potentially be inflationary does not mean that it is a bad thing.
Putting aside some issues with aggregation (Sonnenschein, Mantel, debreu and all that), macro is just micro added up.
An obvious source of inflation other than monetary phenomena are increases in the price of a factor that is used extensively. Oil price shocks for example.
Mark, how do tax cuts increase the factors of production when an economy is at full employment? The level of taxation is not an input in the production function.
Damien — so are you know saying that everything the government does is inflationary? By definition, something has to happen with the money the government raises.
Currently we have a surplus (T>G). Three things can happen. The government can spend it’s surplus (increase G) or it can invest (increase I) or it can cut tax and allow people to increase consumption (increase C) or invest (increase I) or do a mixture of both. In all situations the same amount of resources ends up in the income identity:
Y = C + I + G
Inflation is caused by adding extra money (but not extra resources) to the system. That hasn’t been done. So no problem.
“An obvious source of inflation other than monetary phenomena are increases in the price of a factor that is used extensively.”
I’d attribute that to negative growth in that sector, and the impacts as a technology shock (i.e. lower efficiency of capital etc).
I think it is a better description. Is your money worth less or did that sector have negative growth? Both, your money is worth less, but because of the negative growth.
Oil is now more scarce relative to all other factors whereas excessive monetary growth makes money more abundant relative to all other goods.
Rog, your comment number 40 is silly. To give you a simple example, suppose that G initially equals T. It is clear that if G is held constant and T is reduced, then the government needs to fund the portion of G that is no longer covered by the reduced part of T . In effect, the taxpayers directly funding less government expenditure, so some other source of funds needs to be found. This will involve the taxpayers indirectly funding government expenditure through inflation or increases in future taxes.
“Mark, how do tax cuts increase the factors of production when an economy is at full employment? The level of taxation is not an input in the production function.”
1. Clearly the level of full employment is variable.
2. Indeed. This amount is transferred back into the production function and out of the income accounting identity.
Damien asks: “Mark, how do tax cuts increase the factors of production when an economy is at full employment? The level of taxation is not an input in the production function.”
Tax cuts don’t increase the factors of production… but this has nothing to do with being at full employment.
What tax cuts do is allow a more efficient allocation of the factors of production. This is the equivalent of increasing technology (ie “A”) in the production function y = A f(K,L).
This then turns into Terje’s point about tax cuts being deflationary. As a tax cut allows a more efficient allocation of resources it leads to an increase in total income (Y).
Remember that inflation is caused by extra money (without additional production). The inverse is also true… delfation is caused by extra production (without additional money).
Mark — why are you “umm???” ing me and why are you going on about the real economy when inflation is the change in nominal prices?
Damien — in your answer to rog you miss the obvious answer. When the government runs a defiicit (ie G>T) they can do so by issuing debt. That money comes out of national savings. That savings can now not be used for it’s alternative purposes (either to fund Consumption or Investment). So higher G comes at the expense of lower C and I.
Of course, this gets more complex when you introduce an open economy… but it still doesn’t lead to inflation.
The government does have the option of printing money (ie selling debt to itself) and this WILL cause inflation and therefore decrease the real value of each element in the aggregate demand identity… but this is only an option when they are running a deficit so it’s not relevant for the current situation.
1. Full employment assumes resources cannot be reorganised in a more efficient manner. This assumes full information which is not presently available! Now I agree with what John says about efficient allocation. Such changes bring about strucutrual changes and therefore we see an increase in the supply of labour etc so that some factors do in fact increase. Why don’t taxes reduce the factors actually being used as well as distort their use?
2. You seem to say don’t use a real economy model then say that a tax cut is a purely real and non monetary phenomena. I guess I am going about things the long way.
No, John. I made it quite clear that whether or not a ceteris paribus increase in G-T was inflationary or not depended on whether the economy was near full employment or not.
An increaee in G-T, all else equal, amounts to an injection into the economy regardless of whether the budget was initially in surplus or not. It is the impact relative to the “no change in G-T” counterfactual that matthers. In this thought experiment, which includes the one that I considered initially in this thread (constant G, decrease T, all else equal), if the government is initially running a budget surplus, the counterfactual involves the extra funds sitting in a locked vault somewhere.
When the government issues debt, it implies an increase in future taxes, which I explicitly mentioned.
Damien
You’re calling everyone’s comment silly, yet your stupid quack comment started all this in the first place by saying tax cuts are inflationary.
look if there is no increase in dollars a tax cut cannot shift the demand curve to the right. Please explain how it can.
John, when an economy is not at full employment, tax cuts might increase the supply of factors of production through participation and hours effects.
Damien… where does your “injection” come from? Not from tax. Either by reducing the stock of savings or by printing money. If you do the former then you decrease C + I… if you do the latter then it causes inflation.
But printing money is only relevant when you’re already in deficit. If you’re in surplus then you just decrease your net contribution to national savings. Therefore there is not change to the total of the aggregate demand identity (Y = C + I + G).
This is the important question: who thinks we are at full employment?
Damien
Please explain how can demand curve can shft without a additional supply of money.
This crap has to be nipped in the bud and thrown out with the garbage.
If tax cuts are inflationary you NEED to explain the how there can possibly be a shift in the demand curve without an increase in the money supply. If you can’t , you need to apologise to eveyone here for wasting our time.
Damien, the self-styled economics geek, still does not seem to accept the fundamental argument of how tax cuts could be any more inflationary than government spending?
Hence, if the only alternative to tax cuts is additional government spending, then how could anyone suggest that tax cuts are inflationary.
John Humphreys has clearly demonstrated this point in earlier comments, but Damien seems to prefer to ignore these comments and target the less coherent rantings of some others.
“This is the important question: who thinks we are at full employment?
Only Keynesians could think a 4% unemployment rate is full employment.
They also think tax cuts are inflationary despite the fact that it is impossible to shft the demand curve without a money increase.
Damien: “When the government issues debt, it implies an increase in future taxes, which I explicitly mentioned.”
Or a reduction in future spending. True. I never disagreed with this. But when the government issues debt they are also drawing down on national savings which means those savings can’t go towards private consumption or investment.
Damien: “John, when an economy is not at full employment, tax cuts might increase the supply of factors of production through participation and hours effects.”
Changes in participation counting as a change in “resources” is a definitional issue and not a real disagreement. I define “population” as the resource and the participation rate as one element of the coordination of those resources.
Taxes will impact on participation irrespective of full employment. Therefore tax cuts will impact on participation irrespective of full employment. The most efficient coordination of resources (including participation rate) exists when taxes are zero (no deadweight loss) so removing taxes will ALWAYS lead to a better allocation of resources and a higher national income.
By saying “full employment” I hope you’re not forgetting that economies can still grow.
Richard Dowling.
You’re now the self styled umpire who decides which is and isn’t coherent? Get the hell outta here. Who gave you the smoking jacket, Doofus.
Actually Richard, please point where I was wrong, not where I displayed poor communication skills.
Mark: “This is the important question: who thinks we are at full employment?”
Actually… that question isn’t important at all.
Mark: “You seem to say don’t use a real economy model then say that a tax cut is a purely real and non monetary phenomena.”
That’s exactly what I’m saying. You can’t use a real economy model to show inflation. It just won’t show it. You need to add a monetary element to the model.
And tax cuts are a real phenomena. But showing their impact on the real economy won’t prove anything about inflation. How does the production function prove or disprove the existence of inflation?
JC (comment 73) you’ve just demonstrated my point. I agree with most of your comments - just not your method of expression.
But I’ll take it back it if you’re upset because I don’t want it to distract from the main argument, which is - tax cuts = good =non-inflationary.
Btw - Steve Kirchner at institutional has a good backgrounder take on the tax cuts/interest rate debate.
http://www.institutional-economics.com/index.php/section/comments/tax_cuts_interest_rates_round_up_the_usual_suspects/
The ABC and Age are touting what one fellow from Access Economics had to say about the inflationary effects of the budget on the ABC last night:
———————–
CHRIS RICHARDSON, ACCESS ECONOMICS: I disagree. Remember if you’re the Reserve Bank and you’re doing the forecasts of inflation, today you are going to have to allow for the fact that in the coming financial year the Government will be spending $12 billion extra. $5 billion, more than $5 billion of that will be tax cuts and that will be particularly aimed at lower paid people. They will spend, they will take that money and they will spend. So there’s well over one percentage point of national income being put one way or another back into the punter’s pockets. The extent to which they spend, means that we will pressure an economy completely at full stretch with unemployment at 32 year lows. That would have to make the Reserve Bank sweat and it might make them sufficiently worried to be raising rates ahead of the election. This is a finely calculated gamble.
KERRY O’BRIEN: Just clarify one thing for me, Chris if you would do. Do you think the Reserve Bank had tax cuts and government spending in their sights as part of the reason why interest rates had to go up last time?
CHRIS RICHARDSON: I think that’s very much part of the it. We have seen a stunning series of spending increases and tax cuts out of the Government over the … well now the last five Budgets, and I think the more money that Canberra is pumping into an economy at full stretch, the more money that the Reserve Bank has had to take back out.
JC thanks for your responses. In response to 2, 4 & 5 - There appears to be two or more schools of thoughts on that.
In response to 3. Collectively people are nearly always stupid.
In response to 4.5, I should have referenced point 3. but point taken. Though I do have some other political thoughts on that matter
Jesus bloodly christ. People actually agree with me on this issue. I have argued this issue all over the place many times and I’m generally on my own. What a shock. Sanity exists.
Jason Soon
Chris Richardson is a Keating era hands on levers ex Treasury Keynesian. Not all macro-economists are like him, not by a long shot. The problem is that only the trained monkeys can appear in the media - the really good macro operators work for a government or institution - and so can’t comment publicly on the budget or anything else.
Your argument, in effect, says that all macroeconomists are Keynesian, because they make no value judgements on the nature of things that add to aggregate demand, and hence GDP. You are implying that, for example, $1billion spent on one-off pork (eg the solar panels) is seen by macros as equally good as say an equivalent investment in infrastruture for coal exports or some such thing. And that just isn’t the way good macros look at the world.
THe challenge is that one must use micro principles and actively discriminate against bad spending or micro-policy when coming up with the whole picture. So stop assuming that you micro boys (and girls) are the only ones with any economic sense. The best macro boys use very good micro basics to construct their assesments. It is really, really stoopid of you to confuse them with the performing seals from Access, CommSec etc etc.
So buzz off !
Terje
Don’t get ahead of yourself. After that shocking expose in support of the EU you’ll need to attend confession for a year.
You were close to getting banned on all free market sites over that sinful discourse.
…and, Senor Soon, I forgot to mention the impact of supply side policies is obviously a factor in the above assessment.
Take your point jimmy but your brother macroeconomists on TV are vewwy vewwy bad
Richard, in comment nuumber 70 on this thread you say:
“Hence, if the only alternative to tax cuts is additional government spending, then how could anyone suggest that tax cuts are inflationary.”
This is not the thought experiment that I was analysing. I explicitly said that we were considering an all else equal increase in G-T. see comments 9 and 13 on this thread for example. If you want to think about this solely in terms of tax cuts, then this means that G is the same in both the benchmark scenario (the counterfactual) and the policy scenario.
John, in comment number 72 on this thread you say:
“But when the government issues debt they are also drawing down on national savings which means those savings can’t go towards private consumption or investment.”
There is not complete crowding out. My understanding is that the empirical evidence suggests that complete Ricardian equivalence does not hold in general.
So Dmaien are you still holding by your thesis that inflation is a tax problem and can only be stopped with tax hikes.
Lets break it down to simple laymans language;
increase tax cuts/reduced taxation=increased inflation
decrease tax cuts/increased taxation=decrease inflation.
So stop % rate hikes the govt increase tax.
The question is, what do they do with the surplus?
I’m not saying I agree with the above, its how the “majority” are putting it.
Rog
Inflation= tax cuts is a crock of shit that could only be floating around the halls of our unis and the ABC.
Jsoon
Re #83 - they are indeed vewwy vewwy bad - shamelessly “talking their own book”.
JC, in addition to not understanding economics, you seem to have trouble understanding what other people write. I never said that inflation is a tax problem. I said that under some circumstances tax cuts can increase inflationary pressures. There is a big difference between what you are incorrectly asserting thatr I said and what I actually said. Indeed, in comment number 13 on this thread I noted that monetary factors are an important determinant of inflation, but they are not the only determinant of inflation.
JC, since you choose to behave like a troll, from here on I will treat you like a troll and try to ignore everything you say.
Damien
What you mean is that I disagree with most things you say. That’s what a troll is to a Keynesian like you and most other leftists.
Excuse me for bringing this up but it was you who inserted themselves into this conversation about tax cuts and how it supposed to cause inflation.
I was the first to mention the ABC interview and the discussion about this subject.
You subsequently saw flt to correct me by saying:
. Inflation is not always and everywhere a monetary phenomena. Monetary factors are a very important determinant of inflation, but they are not the only one.
If you’re teaching kids this crap you need to stop it now.
Moreover you’re clearly wrong and you have the friggen hide to call me a troll, you troll.
It wasn’t for nothing that several people here including me took issue with your stupid view that tax cuts will cause inflation.
You need to apologise to all of us for wasting our time, Damien.
And you also need to apologise for being the real troll here.
JC: i think damien has a point. i think tax cuts in the short run will be inflationary as the market signals production to move from useless government goods to useful consumer goods. conversely i think a index based on the price of useless government goods would increase as taxes increase.
and by inflationary i mean increasing the CPI
you turkeys ought to read Ken Henry’s speech to his staff.
JC - Damien’s a good guy. Just misguided.
Homer - which part of the speech precisely? My fav bit is where he says that all government spending redirects investment to low value usage. I always knew that, but I’m sure you and your Keynesian mates learnt something.
Which speech bird brain? I thought Henry was referring to govts that borrow to spend.
This is the dilemma, if the govt spends its “pork barreling” and when it doesnt it is the worst in the world.
Both henry and costello agree on tax cuts that replace govt expenditure as being pro growth.
Treasury secretary Ken Henry has expressed his department’s preference for tax cuts that encourage greater participation in work. Generation X mothers at home and baby boomers contemplating early retirement are the two most obvious targets here.
Some tax-cut dollars could also be ploughed into superannuation, perhaps to encourage greater contributions.
Henry said in his leaked speech to staff last month that last year’s budget reform to abolish the tax on superannuation payouts “is as good as anything I’ve seen the department produce in the 20-odd years of my Treasury career”.
OK, this is without doubt the stupidest spin I’ve encountered for a long time. So much so that it must have been formulated while its proponents were on the sauce. Labor is arguing that by putting five billion dollars in a Higher Education Endowment Fund, the Treasurer has stolen from the Future Fund by not putting the five billion in it instead. Lindsay Tanner concludes: “One thing we can take out of this, that the debate over Labor’s broadband proposal is over.” No, Lindsay. What we can take out of it is that you’re a mendacious blockhead.
Duck
No. Damien has no point to make about this other than highlighting what we lived through when Keynesian economics dominating the profession.
He makes no point. No valid point at all.
The Demand curve cannot shift to the right without additional supply of money. It is impossible, yet he has the nerve to suggest I am making silly comments. That’s totally dishonest and should never ever be tolerated.
hmm CL does not believe mandated funds are mandated funds.
We agree that Cossie is being dishonest on his absurd future fund.
I was interested to see him squirm so much on budget night about Treasury recommending a carbon trading scheme back in 2003. He kept on saying he answered the question when he patently hadn’t.
Now if tax cuts are not inflationary after 16 years of continuous economic growth and there are capacity constraints around then why don’t we go the whole hog and cut more taxes.
Interesting to see no ‘conservative’ commentators saying the surplus should have been bigger and there should have been no spending increased at all.
On Cossie’s on figuring if the surplus is still 1% of GDP and more of it is a cyclical surplus then ipsofacto the structural part of the budget has further deteriorated.
“Interesting to see no ‘conservative’ commentators saying the surplus should have been bigger”
Why should the surplus be bigger Homer?
bigger surplus in good times a deficit in bad times and a balanced budget in the middle.
With capacity constraints you do not want to add to demand rather allow it to be more manageable
Homer
How do shfit the demand curve to the right without the quantity of money changing, Mr. Keynesian lover.
anyone interested in the quantity of money is a fool.
You cannot define it and the demand for money equation is highly unstable for a start
Good news today: unemployment now at the lowest level since 1974!
Labor still waiting for those strikes and mass sackings!
what’s causing those capacity constraints, Homer?
So you’re saying we should give government more money to play with rather than force them to tackle those capacity constraints directly?
Jase,
I don’t mind the government attempting this in areas it can however it can only be done by cutting other programs.
I wouls have thought the RBA must be worrying about NAIRU at present
Damien — ricardian equivalence and crowding out are different things. I agree that ricardian equivalence is not generally 100% (though it seems to have been in some cases).
Ricardian equivalence occurs when people change their savings/consumption habits to perfectly offset any changes in the government’s savings/consumption. That is, the private sector sees a deficit and rationalises future tax increases and so they save money in preparation for the future tax.
Crowding out occurs when government decreased savings provides less money in the capital markets. The mechanism is less savings leads to higher interest rates leads to less private borrowing for consumption and/or investment. While the exact size of the crowding out will be determined by the elasticity of demand for loanable funds, there is no reason to assume that it will necessarily increase the velocity or credit multiplier and therefore lead to inflation.
Also, consider this — between 2006/07 MYEFO and the 2007/08 budget the Treasury increased their forecast of revenue by about $10b. That is, they found out they “accidently” took an extra $10b more than they expected. They decided to give $6b back to us. That’s a very dodgy sort of tax cut.
If you bought something for $30 and accidently gave $40… and then when the mistake was realised you received $6 back… would you be thankful?
NAIRU doesn’t exist as a coherent concept. It is only ever determined in hindsight and so offers absolutely no value as a tool.
Homer — you don’t need to be able to measure money to know that it is important. Inflation occurs when more money is chasing the same number of goods.
JH,
I said they would be worried. I agree that it is only in hindsight you know where it was but the RBA must be getting a little worried at present.
We have had 16 years of consistent growth. I would have thought the old monetarists would be worried any increase in money now would go directly to inflation but according to them we should already be there!!
Now some character is claiming full employment is causing % rates to rise!
Clearly we need more growth and more people.
There hasn’t been an increase in money in the last budget. The only way the government can increase the money stock is buy selling bonds to itself, and they didn’t do that.
There has been a re-arrangement of resources between government investing, govt consuming, private investing, private consuming.
So John, if they didn’t sell bonds to themsleves as you very correctly point out, the money stock hasn’t risen, so the net effect of the tax cuts on inflation is zilch.
I tried to explain this to Homer but he wouldn’t hear of it.
John, you are right about Ricardian equivalence and crowding out being different concepts. However, this doesn’t alter the basic point that an increase in G-T, all else equal, will tend to increase inflationary pressures when the economy is near full employment.
Ricardian equivalence refers to the extent to which an increase in G-T is offset by a decrease in C-S. If Ricardian equivalence holds., then the two effects exactly offset each other and there is no shift in the IS curve. In general, I suspect that complete Ricardian equivalence does not hold. As such, an increase in G-T is only partially offset by a reduction in C-S. As such, the IS curve will shift out. Crowdfing out involves a situation where an increase in G-T results in an increase in the interest rate (after all of the shifts in the IS and LM curves have occured) which reduces investment and thereby partially chokes off the expansionary impact of the increase in G-T. In general, I suspect that crowding out is only partial as well. As such, the net impact of an increase in G-T is an expansion in aggregate demand at the prevailing price level. In situations where you are at full employment, this will result in an increase in the price level, since actual output canot be increased at that point.
Note that these are short term effects. Clearly in the longer term, it may be possible to expand the full employment level of output. This can be done by reducing capacity constraints through investment. Technological improvements might also affect the full employment level of output.
The bottom line is that an increase in G-T will tend to increase aggregate demand at the prev