Friday, 27 January 2012

Terry McCrann's Glowing Endorsement of the Gillard Government

In an interesting twist on the monetary policy debate, News Limited's Terry McCrann is heaping praise on the economic policy management of the Gillard Government saying that “he is happy with the mix” with tight fiscal policy and easier monetary policy.

Indeed, as has been obvious for some time, the current monetary policy easing cycle owes much to the fiscal settings of the Government including the cuts in spending and the massive turnaround (4.3% of GDP) in the Budget balance.

McCrann acknowledges (almost a year after the event), that fiscal policy is playing a vital role in allowing the RBA to move monetary policy to an accommodative stance.  See McCrann here –

McCrann outlines something that is well understood within the Government:  there is a trade-off between fiscal and monetary policy.  He notes:

  • “The past few years have shown precisely why discretionary monetary policy is so much to be preferred to fiscal for economic management, exactly because of its flexibility.”
Yes – spot on Terry.  Fiscal policy is best set for medium term objectives (small surpluses over the cycle) and used only in emergencies to rescue the economy from events like the current Lesser Depression. 

The current mix of economic policy settings are near perfect.  Look at the Australian dollar if you want confirmation of the assessment of global investors.   As McCrann touches on, picking up the issue I have written about before, monetary policy can be changed quickly, reversed if needed, moved from super easy to super tight in next to no time.

It’s set by the independent RBA Board without fear or favour.

And the “killer” fact – IT”S FREE!

A budget decision to boost spending on project XYZ is obviously going to have an impact on the budget and public finances.  It can and is difficult to unwind.  The warning label on fiscal stimulus should be “use only in emergencies”.

McCrann notes:
  • "Once the budget has been sent deep into deficit it is extraordinarily difficult to bring it back even to balance. It required a tough commitment running some years into the future,"

Spot on Terry.  But it is being done right now with the most dramatic turn in the Budget balance ever recorded.  A tick for the Government.

An interest rate cut, as discussed, has no direct impact on the budget or public finances, but it does help to deal with the business cycle, boosts borrowing and economic activity… and reverses these in the event the economy overheats.

McCrann’s final point,
  • "absent another global meltdown, fiscal policy is effectively locked into tightening. The government remains committed to cutting this year's expected $40 billion-odd deficit to balance next year."

  • "I'm more than happy that this is the mix. That Gillard and Swan have fiscally handcuffed themselves and the cabinet, and that it will be all down to the judgment and nimbleness of RBA governor Glenn Stevens, the bank's management and the board."

It is good to see this discussion starting to permeate the economic policy debate.  It helps explain why the RBA is going to cut interest rates which is something that people who fail to look at the budget never quite understand and certainly missed late last year when they were screaming about an inflation blowout and the need for many more interest rate hikes just weeks before the RBA starting interest rates.

Fiscal policy matters and right now, the Government is committed to keep it as tight as a drum.

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