Saturday, 17 December 2011

Sloan gets it wrong

Judith Sloan reckons that “the prospect of an actual budget surplus … looks reasonably remote.”

She cherry-picks a range of data and gets some facts wrong to conclude that a couple of years ago we saw “the biggest splurge in government spending since Gough Whitlam was in office.”

The Sloan article is here.

It’s a strange article. There was no reference at all to the Global Financial Crisis and the fact that Australia was one of few countries to avoid recession. She fails to acknowledge or reference what is a common assessment that the fiscal response was a key factor behind that world best performance.

Sloan also looks at the issue of the budget from one dimension noting that if the economy is weaker than projected, there will be a deficit in 2012-13 (which is true), failing to note that if the economy happens to be stronger, the surplus will be larger (which is also true)! Pretty basic stuff.

In terms of some specifics, Sloan makes a hash of her analysis of fiscal settings.

Sloan notes that: “General government expenditure went from 23.8 per cent of GDP to 25.9 per cent in one year (2007-08 to 2008-09). It rose further in 2009-10, to 26.3 per cent.”

Those numbers are wrong: According to Table D1 in the recent MYEFO, general government expenditure rose from 23.1% of GDP in 2007-08 to 25.2% in 2008-09 and reached 26.0% in 2009-10.

Presumably because the facts don’t support her argument, Sloan did not mention the fact that expenditure fell 1.3% of GDP, back to 24.7% in 2010-11 and is projected to fall to 23.6% in 2012-13. Recall that the average level of government spending to GDP under the twelve Howard government budgets was 24.2%.

On these facts, I am not sure who is guilty of “reckless spending”.

Sloan then pulls out an old favourite by suggesting that “This short period saw the biggest splurge in government spending since Gough Whitlam was in office.”

The irony in that comment is that in Whitlam’s final budget, government spending to GDP was 24.3% (recall the average for the Howard government was 24.2%) a figure that blew out to 26.7% in the last Fraser / Howard government budget.

Sloan reckons “that scarce government funds have been spent on low-value programs, to prevent an economic downturn that Australia would probably have avoided by dint of aggressive monetary policy, the depreciation of the dollar and our links with booming Asia.”

Sloan might have been looking in the wrong direction when there was the threat of "an economic downturn" when the RBA cut interest rates to an all time low of 3%, the AUD fell to US$0.60 and the strong growth in Asia helped to support growth. How much more could have been delivered on any of these fronts is problematic. Every reasonable person knows the fiscal stimulus preserved thousands of jobs and with these other factors, helped Australia avoid recession.

It’s a weak article seemingly based on bias, prejudice and aimed to spin a line about some wasteful government spending. For Sloan’s sake, it’s a pity the facts suggest otherwise.


  1. Why the anti-Labor agenda from the Australian? They are not that radical a govmnt at all.

  2. It's Sloan not Sloane.

    "Every reasonable person ..."

    Give me a break. Plenty of reasonable people don't agree, like Tony Makin. In fact open any macroeconomics text. The standard result is that in an open economy, fiscal stimulus has no impact on output and unemployment.

    The government panicked and over-reacted. When that became clear in the second half of 2009, they stubbornly refused to adjust course despite the warnings of reasonable people such as Warwick McKibbon and Gary Banks.

  3. It was interesting to see uber-keynesian Paul Krugman reiterate his position on fiscal policy just in the last week:

    "Deficit spending is expansionary when the economy is in a liquidity trap; it does nothing but crowd out other spending when you’re not up against the zero lower bound, and the Fed will just raise rates to offset fiscal expansion."