Mr Micawber and Australian economic policy: dealing with economists ‘carefully’


The driving force behind Australia’s current macroeconomic policy is a fictional Charles Dicken’s character, Mr Micawber. His famous quote:

Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

seems to be at the heart of government policy. A surplus will bring happiness and a deficit will bring misery.

This has no foundation in economics (at least on a year-by-year basis). But the government appears driven to pursue a budget surplus regardless of advice from the OECD, its advisers and its own supporters. So the only conclusion is that it is political, not economic, happiness and misery that Mr Micawber is advising the Prime Minister about. If the government does not deliver a surplus it will be hammered mercilessly by the opposition. Indeed, the AFR believes that this fear (together with the unfortunate fact that a budget surplus is unlikely) will drive the timing of the next election:

While financial markets have long speculated the government will go to an election before the budget rather than admit it cannot meet its surplus goal, …

Unfortunately, this has led to economic policy driven by politics rather than – well – economics. I have commented on this before. But perhaps this approach is understandable. As the Prime Minister noted on ABC radio today:

SABRA LANE: You speak to economists?

JULIA GILLARD: I deal with them carefully.


6 Responses to "Mr Micawber and Australian economic policy: dealing with economists ‘carefully’"
  1. Reagan had his strategic budget deficits in the 1980s to tie the hands of a future incumbent with different political goals.

    Left-wing governments use strategic budget surpluses to free their hands at future elections. They can buy their way back into office without promoting uncertainty about future taxes.

    OECD governments who are running large budget deficits are experiencing slow GDP growth

    See Fiscal Sentiment and the Weak Recovery from the Great Recession: A Quantitative Exploration by Finn E. Kydland and Carlos E. J. M. Zarazaga

    • The U.S. economy isn’t recovering from the Great Recession with the anticipated strength.
    • A widespread conjecture is that this weakness can be traced to perceptions of an imminent switch to a higher taxes regime.
    • Their main finding is that the fiscal sentiment hypothesis can account for a significant fraction of the decline in investment and labor input in the aftermath of the Great Recession.
    • The perceived higher taxes must fall almost exclusively on capital income. People suspect that the tax structure that will be implemented to address large fiscal imbalances will be far from optimal

    Australian tax increases to close the deficit are likely to be increases in capital income taxes. A swift return to surplus avoids this fiscal sentiment that would weaken the recovery.

  2. It may be attributing too much good sense to Swan and his advisors, but there have been occasional signs that the government well knows it is well in structural deficit at a time when it should be in structural surplus. That is, to adapt the analogy, they fear our current income is eighteen pounds, not twenty.

    The 2008-09 spending was done to prevent a dip into recession, and may have worked, but whether it worked or not, one known corollary was that if a crude Keynesian analysis was correct, we would have to settle for slower growth thereafter as we repaid the debt. At least some figures in the government understood things this way at the time.

    All that seems to me a reasonable way of explaining the government’s fiscal behaviour since that time.

    It also seems to me that Swan and his colleagues have done a pretty good job of sticking to fiscal discipline, even when given excuses to desert it. If the reasoning set out above is in fact their reasoning, they have not sold it well to the political elite – but selling a narrative to the political elite has never been this government’s strong point.

    An alternative theory is that the government does not want to be jeered at by the Opposition for failing to deliver a surplus. This seems possible, but not entirely likely: truly cynical analysts would surely argue that if there were votes in it, the government would happily endure a bit of jeering.

    Jim, I’m not sure why you believe that “Australian tax increases to close the deficit are likely to be increases in capital income taxes”, especially since the government has invested some effort in cutting corporate tax rates. and since the current tax discussion seems to include much talk of raising the GST rate and broadening the base. But tell me where I’m wrong.

    • thanks, I have a lot of time for the economics of expressive voting.

      The expressive voter is now a fiscal conservative. Voters booing fiscal deficits really started at the end of the 1990s.

      There may have self-interest in there. Self-interest is a safe bet because it is always trying in any race.

      With an ageing population, voters do not want large debt servicing bills from fiscal follies of decades gone by limiting health and pension funding to the elderly when they become the elderly.

  3. We have had below trend growth in nominal GDP for some time now so to assert we should have a substantial structural surplus is incorrect.
    The budget should be in a moderate deficit as it is.

    The large deficits in Europe are the result of cutting their structural deficits far too quickly in a slowdown. This of course produced a recession.

    I agree with Ross Gittins there is nothing magical about aupl;us or a deficit

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