VOW: Fiscal Policy and Public Investment

["Schulte-baeuminghaus" <schulte.baeuminghaus@xxxxxxxxx>]

The case for a fiscal authority.

 

What is, in my opinion, most important is to have a range of public investment projects pre-planned for implementation when recession/depression threatens or hits.

It has a much greater impact on employment both directly and through multiplier effects. It builds the productive infrastructure and improves productivity.

In other words, it constructs a basis for real growth in the future - growth that will be of advantage to the whole economy, workers and employers, public and private investors.

Public investment is a central element in VOW, both to meet the short-term need for stimulus in a recession and to meet the long-term need to achieve victory over want in low-income, disadvantaged communities - in both poor and rich countries.

That does not mean that we should not construct responsive and flexible fiscal policies. All the available instruments of economic policy should be used, rather than our long-entrenched, half-witted dependence on a robot-like central banker raising and lowering interest rates as a mentally-retarded lift-driver might go up or down according to whether lights flash red or green on his dashboard.

Within the available instruments of policy, their values to serve specific purposes should be carefully assessed. Public investment, though out of fashion in the past couple of decades, has a value that needs to be considered carefully, objectively and, given the trends in the world economy at the moment, with a high degree of urgency.

 

 

James Cumes

 

 

 

 

 

----- Original Message -----

From: Jozef Imrich <chezimrich@xxxxxxxxxxx>

To: <schulte.baeuminghaus@xxxxxxxxx>

Sent: Thursday, January 31, 2002 12:41 AM

Subject: Toward a more active fiscal policy

> 1/31/2002
> Author Alex Erskine
> Title Toward a more active fiscal policy
> Category Economics
> .................................................................................... Introduction
>
> Australia needs a fiscal authority seperate from political government to
> better manage the economy
>
>
> The motivation for the topic is that we are over-reliant on monetary policy
> to steer the economy. For instance, there are many in the media already
> crying (they are borrowers) that the RBA will soon tighten monetary policy
> in order to jam the inflation genie back in her bottle.
>
> While I disagree with the plaintiffs on several grounds (the inflation
> target is not to be interpreted so tightly, the bigger danger is deflation -
> not inflation, the RBA anyway will wait for the Fed to tighten - which won't
> be soon), I am worried that monetary policy will lose its power to rescue a
> weakening economy. If the central bank were to ease in the face of rising
> inflation, the market might panic, worried at what the bank must know. So I
> would like to see another tool of stimulative macroeconomic policy made
> available - and what better than fiscal policy.
>
> I do not believe reliance on the automatic stabilisers is the limit for
> prudent fiscal policy. Despite the bad press that more active fiscal policy
> receives, any look back at history will show that we have had an exemplary
> fiscal policy for many years in Australia. Recessions have seen deficits and
> booms have seen surpluses. Throughout, debt-to-GDP ratios have been modest
> in fact and in projections. Even today, the forward projections involve a
> cash surplus of $1 billion that - if anything - is surprisingly big
> considering the media screams that the surplus was being squandered. Fiscal
> activism is therefore available if there is a mechanism by which it can be
> used.
>
> Do note however, that anyone who tightens fiscal policy in order to
> 'preserve a surplus' as a symbol of prudence and, in so doing, prevents the
> automatic stabilisers to work during a period of growth that is below
> potential, is foolish. The election campaign worried me because of some of
> the stupid statements on fiscal policy from people who should know better,
> so a brief refresher on primary balances, the difference between consumption
> and investment, cyclical and structural balances and so on should be
> compulsory for any would-be Treasurer.
>
> Active use of fiscal policy has an unfairly bad name. Just because mistakes
> were made in the past does not condemn us to repeat them. We can learn from
> history. The Economist rightly points out that active fiscal policy is often
> 'too much, too late'. The Economist goes on to argue that what we need is to
> de-politicise fiscal policy, by creating a fiscal authority separate from
> political government, which is able to temporarily vary tax rates or benefit
> payments for macroeconomic stabilisation purposes. The debate is furthest
> advanced - like everything else is - in the US, where a good fiscal stimulus
> is being held up by bickering in the US parliaments.
>
> It seems to me that Australia needs just such a fiscal authority. Its
> mission should be to work in conjunction with the inflation-targeting
> central bank to maintain Australia's growth rate as close to potential as
> possible. (Potential, incidentally, should not be the miserable 3.5% that
> Treasury assumes, but the 4.5% that we have seen the economy grow at through
> the second half of the 1990s without inflation or balance of payments
> problems.)
>
> The tools at the authority's disposal should include the power to vary
> income taxes by, say, up to 5% for up to two years, and the GST by up to 2%
> but for a shorter period. It should also have the power to commensurately
> alter the value of benefit payments by an equivalent amount and for similar
> temporary periods. It may also need the power for finely targeted tools,
> like the first home buyers grant - heaven forbid that the FHOS has to be
> used as vigorously again.
>
> The FitzGerald and Garnaut inquiry into federal-state fiscal relations might
> quite appropriately comment on this. The most withering criticism that I
> received for my proposition that we cut the GST for a temporary period as a
> stimulus was that it could never be politically acceptable - meaning that it
> would take too long to get all the parties at federal and state level to
> agree to do something in the national interest. Well, my response is to take
> away the politicians ability to procrastinate.
>
> And - yes - of course the fiscal authority must be accountable to the
> Parliament to the same extent as the RBA (i.e. not very, so long as it
> performs adequately).
>
> [Editor's note: Alex will be presenting this to a meeting of economists
> shortly and will report back with their views.]
>
>
>
> Jozef Imrich