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Where Budget Surpluses Come From

Treasury Secretary Ken Henry, in his traditional post-Budget address to ABE, points to the correct interpretation of the role of the budget in demand management:

activist counter-cyclical fiscal policy might be frustrated by lags of recognition, implementation and transmission. And its effectiveness might be compromised by Ricardian equivalence, the permanent income hypothesis or import leakages. I noted that these lags and questions of effectiveness pose real challenges for the use of counter-cyclical fiscal policy. But I also noted that they do not rule out such use.

And, obviously, they do not rule out allowing the so-called automatic stabilisers to work. That’s probably how the fiscal stance contained in this budget should be interpreted. With respect to the current year, 2007-08, the Pre-Election Economic and Fiscal Outlook (PEFO) published in the November 2007 election period estimated an underlying cash surplus of 1.3 per cent of GDP. Last week’s budget reveals parameter and other variations since PEFO that would have added $5.2 billion, or about 0.5 per cent of GDP, to the underlying cash balance. Of this, more than 0.3 per cent of GDP is additional tax revenue. Most of that upward revision to tax revenue has been ‘saved’, to achieve a 2007-08 surplus estimated now to be 1.5 per cent of GDP. For the budget year, 2008-09, the government has targeted an underlying cash balance excluding tax revenue revisions of the same proportion of GDP – that is, 1.5 per cent. Adding the revisions to tax revenue since PEFO, the estimated surplus for 2008-09 is 1.8 per cent of GDP.

See the end of Henry’s remarks for a swipe at opposition Senators.

 

posted on 20 May 2008 by skirchner in Economics, Financial Markets

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See the end of Henry’s remarks for a swipe at opposition Senators.

The government just committed a massive microeconomic policy blunder on industrial relations, and Henry quibbles about a “road user charge” (whatever that is).

Posted by benson  on  05/20  at  06:08 AM


I agree benson. It’s also amazing that there was not a word about what might be the appropriate use of large budget surpluses arising from a sustained terms of trade boost and the enormous dangers of central planning of infrastructure investment that the government has just committed to.

Posted by .(JavaScript must be enabled to view this email address)  on  05/20  at  06:48 AM


Some nice graphs in there.

So ... which one of you free market economists is going to put their hand up and say Brendan’s fuel excise cut is a good idea?

FWIW I hope Turnbull resigns from the shadow ministry and goes back to being a backbench policy wonk like he did a few years ago (remember his tax reform ideas?).  There he can sit back, relax, and watch Brendan implode.

Posted by .(JavaScript must be enabled to view this email address)  on  05/20  at  10:19 AM


Is there any support whatsoever for deleting the corporations power in the Constitution?

I’m tired of living under a one-size-fits-all system where we have to suffer the central planning fantasies of the nuts in Canberra who never took the time to understand Friedman or Hayek.

Posted by Sukrit Sabhlok  on  05/20  at  02:24 PM


The government just committed a massive microeconomic policy blunder on industrial relations

Benson and Rajat:  Aren’t you forgetting that the industrial relations policy you support was wildly unpopular with the people and it was the single biggest factor in the defeat of the Howard government?  I mean, you can call it a “blunder” if you like but its a blunder the majority of people supported, and that’s how democracy works.

Which has me wondering, if the RBA drives the rest of the economy into recession just to keep a lid on the resources sector, I can imagine “inflation targetting” will become increasingly unpopular with the, er, people.

Again, surely there is a better way.  Stiglitz was on AM this morning saying that countries that employ inflation targetting will drive their economies into recession and have absolutely no effect on imported inflation (food, energy etc)

Why are we hurting everyone just so we can stop one group spending like crazy?  Shouldn’t we just target that one group?

Posted by .(JavaScript must be enabled to view this email address)  on  05/20  at  10:24 PM


David, you could take the pressure off interest rates by adding to the supply-side of the economy, through, for example, IR reform.  NZ has a lower unemployment rate and inflation rate than Australia, partly because they have a more liberal IR set-up.

Posted by skirchner  on  05/20  at  10:53 PM


David, you could take the pressure off interest rates by adding to the supply-side of the economy, through, for example, IR reform.

Er yeah, but we just voted against IR reform.  Didn’t you notice that bit?

Seems to me freeing up the labour market would do SFA (last definition) about soaring food and energy prices.

NZ has a lower unemployment rate and inflation rate than Australia, partly because they have a more liberal IR set-up.

Yeah but the Kiwis aren’t getting the huge boost in national income we’re getting from the resources sector ... and last time I looked the NZ economy looked like it was heading for recession.

Here’s Stiglitz saying inflation targeting is a failure which is more or less what he said on AM this morning.

Posted by .(JavaScript must be enabled to view this email address)  on  05/20  at  11:09 PM


David, just because the electorate voted for a particular policy (and taking as given what you said about IR being pivotal in the last election) does not mean that the policy is itself not bad from an economic perspective. For example, the people voted against Fightback! in 1992, but this led to terrible economic policies over the next term. And what is your solution? To target the highest value added sectors of the economy? Now that would be a real policy blunder.
And BTW, reducing excise would be a better use of funds than spending it on Kim Carr’s pet projects.

Posted by .(JavaScript must be enabled to view this email address)  on  05/20  at  11:46 PM


David, just because the electorate voted for a particular policy ... does not mean that the policy is itself not bad from an economic perspective

Sure, but you can’t call it blunder by the government.  You can call it a blunder by the people perhaps for not listening to the wisdom of economists, but not the government—they’re just doing what they said they would.

And what is your solution?  To target the highest value added sectors of the economy?

One problem, which you conveniently ignore, is that the highest value added sector of our economy, namely coal mining and exports, has this minor negative externality called climate change.  Given there is Buckley’s to zero chance of any meaningful international agreement on carbon pricing/trading in the next decade, why don’t we tax the poison at the port?

I mean, we’re behaving like the Taliban presiding over a surge in demand for poppies.  If the price of heroin soared to record highs would you be cheering on the boost in terms-of-trade for Afghanistan?  Would you be saying we can’t tax (or ban) poppy exports because its the “highest added value” sector of the Afghan economy?

Seriously, if you accept that coal is the enemy of the human race is there any difference?  I’m sure this is why so many free market types resort to denialism, because “market failure” is not in their vocabularly, and its just easier to pretend its not happening.

And BTW, reducing excise would be a better use of funds than spending it on Kim Carr’s pet projects.

Yeah well, I’m not about to defend Kim Carr.  He could be second most scary member of the government after “Marn”.

Talking of Fightback! I’d like to think Turnbull could come up with something similar on the back bench.  Clearly tax reform and climate change are his pet issues, and I think we all agree the right way to tackle climate change is through tax reform.  What I really don’t get is why so many on the right waste so much time denying climate change, when the best solution (carbon taxes in return income and other tax cuts) is really just shifting the tax base away from income and towards consumption, which I’m sure you all support.

Sadly it seems Malcolm has caved and will (very unconvincingly) tell everyone at press club that he supports Brendan’s idiotic fuel excise cut.

Posted by .(JavaScript must be enabled to view this email address)  on  05/21  at  12:53 AM


Given there is Buckley’s to zero chance of any meaningful international agreement on carbon pricing/trading in the next decade, why don’t we tax the poison at the port?

This is a whole separate issue, but I can’t see an economic case for taxing greenhouse gases if others don’t. Presumably, the offending activities would simply move offshore. Garnaut has it all wrong: climate change policy is nothing like trade liberalisation policy - the latter confers national benefits from unilateral adoption whereas the former does not.

Posted by .(JavaScript must be enabled to view this email address)  on  05/21  at  04:11 AM


I can’t see an economic case for taxing greenhouse gases if others don’t

That’s the thing, there is no economic case because conventional economics cannot account for the costs of climate change and the benefits of avoiding it.

So its a Mexican standoff.  Everyone’s saying I won’t do anything if you don’t, and meanwhile the planet burns.

the latter confers national benefits from unilateral adoption whereas the former does not.

Well that depends if you think maintaining habitable continent where we can, er, grow food, is a “benefit” or not.

So Australia continues on its merry way profiting from the destroyer of worlds, government coffers filled with coal (blood?) money, and cheered on by economists.

If Hansen is even half right, and yes there is still some doubt, how do you think history will judge today’s economic orthodoxy?

Posted by .(JavaScript must be enabled to view this email address)  on  05/21  at  05:56 AM


So ... which one of you free market economists is going to put their hand up and say Brendan’s fuel excise cut is a good idea?

I will. I had a letter in the AFR on Monday.

“Laura Tingle suggests that cutting the fuel excise by 5c per litre is somehow inconsistent with environmental concerns (Populist attack misses the main target, 16May).  Yet we now know that petrol consumption is relatively insensitive to price changes.  In other words the price decrease will have a large impact on government revenue, but a small impact on petrol demand.  Lowering the excise will also put less upward pressure on the CPI.  This is hardly irresponsible policy – indeed, the 5c just barely covers the interaction between the GST and the excise on petrol.  It will certainly do more for ‘working families’ than the Petrol Commissioner can ever do.”

Okay, so I’m a bit naughty - 5cpl is a bit more than the 3.9cpl interaction.

Posted by .(JavaScript must be enabled to view this email address)  on  05/21  at  06:51 AM


It will certainly do more for ‘working families’ than the Petrol Commissioner can ever do

I don’t think anyone believes the Petrol Commissioner (or “FuelWatch”) will do anything do they?  The whole idea is to appear to be doing something about something which nobody can do anything about.

Surely if there is a demand-supply imbalance we need to let this thing run its course.  Isn’t that an article of faith for you guys?

I don’t know at what price we’ll see demand ease off significantly, but suspect its well north of $2/L, could even be as high as $5/L.  Who knows, the roosters might start laying at that price!

Tinkering at the edges will make b*gger all difference and will only end up costing the government a billion or two.  The fact is the 5c/L will get eaten in a week’s trading on the oil markets as crude continues its relentless march to infinity.

Posted by .(JavaScript must be enabled to view this email address)  on  05/21  at  08:00 AM


Sinc, is this some kind of ‘starve the beast’ ploy?  A one-off impact on the price level doesn’t have much value in controlling inflation.

They should not be lowering excise to offset market-generated price signals.  By all means lower the general tax burden, which will help with the rising cost of petrol, along with everything else.

David, suggest you read Huber and Mills “The Bottomless Well: The Twilight of Fuel, the Virtue of Waste and Why We Will Never Run of Energy,” especially the chapter on ‘Saving the Planet with Coal.’  You’ll sleep better at night!

Posted by skirchner  on  05/21  at  08:19 AM


What Stephen said.

David, suggest you read Huber and Mills “The Bottomless Well: The Twilight of Fuel, the Virtue of Waste and Why We Will Never Run of Energy,” especially the chapter on ‘Saving the Planet with Coal.’ You’ll sleep better at night!

Is that in the fiction or non-fiction section?

Posted by .(JavaScript must be enabled to view this email address)  on  05/21  at  08:22 AM


Is that in the fiction or non-fiction section?

It’s in the same section as the books on global warming.

Posted by benson  on  05/21  at  08:27 AM


The inflation impact will largely be a one-off and revolves around measurement issues* (secondary effects will be smaller).

If we believe in some sort of peak-oil story (as say davidm does) then it would be a waste of time and effort.

But this is a tax cut - and with $40-odd billion going into slush-funds to subsidise future spending it is affordable (of course so are all sorts of other tax cuts - I’d far prefer to see cuts in both the personal and corporate rates). The price signal is still there, and unlike the alternate policy (Fuelwatch) it preserves private choice in price setting.

*measurement issues are important at the moment - I’ve seen an analysis that calculates that the measurement of the cost of financial services (proxied by the difference between the 90-day bill rate and the cash rate) is adding about 0.5% to the CPI inflation rate.

Posted by .(JavaScript must be enabled to view this email address)  on  05/21  at  08:57 AM


If we believe in some sort of peak-oil story (as say davidm does) then it would be a waste of time and effort

Look guys, just picture me typing this in a bunker, 20 feet under, in a room stacked with tinned food, bottled water and of course, guns, lots of guns.

I don’t know whether I believe in a geological peak in oil production or not.  What I do believe is supply is not meeting demand at the moment, the transition from oil to some other energy source and/or transportation technology will not be easy, and since I’ve been following this the peak oilers keep getting their price forecasts right, and you free market types keep getting it wrong:

History of ABARE’s oil price forecasts

I’m still waiting for the roosters to lay.

Posted by .(JavaScript must be enabled to view this email address)  on  05/21  at  09:34 AM


since I’ve been following this the peak oilers keep getting their price forecasts right, and you free market types keep getting it wrong

You haven’t been following this for that long have you? Reminds me of the currency markets when for a long time it looked like technical analysis could out-perform fundamental analysis. Then one day it all reversed and the techies were all out on a limb and the ‘fundamentalists’ all came back into vogue. (Of course, we all know that a random walk model outperforms both).

We ‘free market types’ would prefer to tell you want is going to happen, rather than make a firm price forecast as at some future date. Consumers will economise, producers will search for more and substitutes will develop. This takes time.

Posted by .(JavaScript must be enabled to view this email address)  on  05/21  at  10:51 AM


David, I suggested Huber and Mills because they readily concede on peak oil and global warming and yet are still techno-cornucopians.

Sinc, credit spreads are certainly adding to inflation, but they are part of the consumption basket, even if they are being pushed higher by exogenous factors.

Posted by skirchner  on  05/21  at  11:06 AM


David, I suggested Huber and Mills because they readily concede on peak oil and global warming and yet are still techno-cornucopians

Yeah looks like a good read.  Peak oil is “broad church” (to borrow one of Howard’s favourite phrases) ranging from the “doomers”, who think we’re headed for “dieoff” real soon now, to the techno-fix optimists who think we’ll all be running around in EVs hooked up to solar panels and/or nukes circa 2030 ... which is pretty much Huber and Mills’ view.

I skimmed a few reviews.  The idea that energy efficiency often leads to more energy use not less is certainly valid, but the notion that North America’s forests are soaking up the growth in CO2 emissions worldwide is a crock.

You haven’t been following this for that long have you?

Ouch!

Consumers will economise, producers will search for more and substitutes will develop.

Er, thanks for filling me in there.

Economise: certainly.

Search for more: Sure, but the evidence of the past 40 years (quite a long time really) suggests they’ll find less, and it will be increasingly difficult and more expensive to extract.

Substitutes: They exist, but they’re all worse (oil sands, CTL, biofuels, shale…)  There’s certainly no whale-oil-to-petroleum-oil transition imminent.  In other words we’re not about to substitute oil for something better, like we did with wood-to-coal and coal-to-oil.

I’m completely open to the possiblity that someone might come up with a fusion engine the size of a basketball next week, but it seems unlikely.

BTW, WTI above $130 now, Tapis above $136.  Come on guys, something’s going on here, either that, or its a bubble, and Stephen says bubbles don’t exist.

Posted by .(JavaScript must be enabled to view this email address)  on  05/21  at  11:42 AM


Yes, I understand that. But at 4.47% it seems very hefty in the CPI and those spreads are a proxy measure not the actual measure of financial services (not to households anyway). To put that figure in context the weighting on alcohol is 4.38%. Sure when the ABS constructed the measure they didn’t forsee a credit crunch and (probably) close enough was good enough. So I think the weight is high and the measure currently biased upwards. This, of course, will unravel sooner rather than later (I imagine) and hopefully following Henry Ergas’ work in the area a bit of a debate on the CPI calculation will occur (5 - 6 years between household surveys is just silly).

Posted by .(JavaScript must be enabled to view this email address)  on  05/21  at  11:53 AM


Dr Davidson writes:

‘we now know that petrol consumption is relatively insensitive to price changes.  In other words the price decrease will have a large impact on government revenue, but a small impact on petrol demand.’

I think this is a good reason not to endorse a 5c petrol excise tax cut.

The fact that the demand for petrol is relatively own-price inelastic means that taxes imposed on petrol will generate less deadweight loss than taxes imposed on other goods, with more elastic demand and supply. Thus, petrol taxes are a cheaper way of raising a certain amount of tax revenue in terms of the inefficiency they generate.

Furthermore, there is also the benefit of petrol taxes acting as an indirect price for road travel. An optimal road pricing system would involve tolls on roads, rather than petrol, but there is very little political impetus to introduce more tolls roads and toll exisiting roads. Even though a 5c cut may not influence driving patterns much, it would be, in my view, a move in the wrong direction.

By implementing taxes that follow the principle of the Ramsey rule (the ratio of tax rates on 2 goods should be related to the inverse of their elasticities, in a 2 good example), the same taxation revenue could be generated for a lower deadweight loss.

If we must have a government, it is better the taxes they raise do as little damage possible, and reform/abolsih other taxes, as well as reduce government expenditure, currently far, higher than is justifiable for the purposes of protecting property rights, law enforcement, providing certain public services, and the like. The system of high effective marginal tax rates created by the present personal benefits system and progressive marginal tax rates immediately comes to mind as an example of one area in need of reform.

Posted by .(JavaScript must be enabled to view this email address)  on  05/21  at  12:02 PM


WTI above $130 now…

Make that $134.  Up $5 in single trading session.  That’s Brendan’s tax excise cut gone overnight.

Posted by .(JavaScript must be enabled to view this email address)  on  05/21  at  09:59 PM


The key disagreement on this post seems to be the relevant counterfactual rather than policy per se. We would all prefer broad-based income tax cuts to excise cuts but the real choice may be between an excise cut and infrastructure slush funds. And, sure, a 5cpl excise cut will not be apparent if oil prices rise, but prices at the bowser would still be lower in the future than if excise were not cut. That constitutes a benefit to consumers. So while Nelson could have done a lot better, his proposal may nevertheless be better than what the government is offering.

Posted by .(JavaScript must be enabled to view this email address)  on  05/21  at  11:22 PM


but the real choice may be between an excise cut and infrastructure slush funds

Nelson is a choice?  Mr 7%?  Really?

The real choice is between the government and whatever Malcolm’s working on.  So fire off a few suggestions to him in three lines or less:

My thoughts:
- Align corporate and personal income tax rates
- Negative Income Tax to fix those high EMTRs and the welfare system
- Fund it all with a thumping great carbon tax (you guys can call it a consumption tax if it makes you feel better)

prices at the bowser would still be lower in the future than if excise were not cut

Isn’t infinity minus 5 cents still infinity?

Posted by .(JavaScript must be enabled to view this email address)  on  05/22  at  12:21 AM


Sinc, ex-financial and insurance services, the CPI is still running at 4% y/y (3.5% y/y if you further excluding housing).  The CPI ex-transport (the most oil affected) is running at 3.9%.  None of these are as bad as the All Groups series, but bad enough.

Posted by skirchner  on  05/22  at  01:12 AM


I’m not saying CPI isn’t high. I’m saying there is an upward bias in the measurement. I’ll send you the credit spread document.

Greg - I have been meaning to write something on the differences between optimal taxation theory and taxation practice - so you comment is a goad to action.

Posted by .(JavaScript must be enabled to view this email address)  on  05/22  at  02:15 AM


I’m sure you guys all subscribe to the WSJ.  Do you mind telling me what the rest of this says?

International Energy Agency Warns Of Oil-Production Crunch

Posted by .(JavaScript must be enabled to view this email address)  on  05/22  at  06:59 AM


Energy Watchdog Warns
Of Oil-Production Crunch
IEA Official Says Supplies
May Plateau Below
Expected Demand
By NEIL KING JR. and PETER FRITSCH
May 22, 2008; Page A1

The world’s premier energy monitor is preparing a sharp downward revision of its oil-supply forecast, a shift that reflects deepening pessimism over whether oil companies can keep abreast of booming demand.

The Paris-based International Energy Agency is in the middle of its first attempt to comprehensively assess the condition of the world’s top 400 oil fields. Its findings won’t be released until November, but the bottom line is already clear: Future crude supplies could be far tighter than previously thought.

Posted by skirchner  on  05/22  at  11:21 AM


Thanks.  It was behind a paywall before but its available to anyone now.

Posted by .(JavaScript must be enabled to view this email address)  on  05/22  at  11:35 AM



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