"Few economists think there's any need for a surplus [in 2012-13], and some are concerned about the impact of spending cuts on demand."
There is no doubt that tight fiscal settings can and will lead to slower growth than otherwise and growth looks to be moderate as 2011 draws to a close. But I think that concern is overdone for the Australian economy because:
- Even with trend or slightly sub-trend growth, the economy can accommodate a bit more fiscal contraction. Call it saving for a rainy day.
- There is scope to ease other policies (interest rates) if things turn out too weak, which is unlike most of the industrialised world where interest rates are effectively zero. They confront economic ruin with tight fiscal settings when the central bank can't do anything.
I often think of the fiscal policy discussion along the lines of what error would you prefer to make in setting the Budget?
Having it a little too loose, thereby eroding public savings, adding to inflation and risking long run strucutral problems or rather having fiscal policy a little too tight, thereby building public savings a bit too quickly, trimming inflation pressures and giving policy makers flexibility in the long run to deal with the next economic shock when it arrives.
I know what I, and I think the Gillard Government would prefer.