Australian government doesn’t deserve office, nor does the Opposition!

Yesterday (May 2, 2016), the Reserve Bank of Australia (RBA) dropped the short-term policy interest rate by 25 basis points (1/4 of a percent) to 1.75 per cent, a record low as a result of its assessment of a weakening economy and the deflation that has now been revealed by the ABS. I wrote about the latest CPI data in this blog – Australia enters the deflation league of sorry nations. The fact that the RBA is trying to stimulate growth is a sad testament to the current conduct of the Australian government (and the Treasury), which despite all the lying rhetoric that its corporate tax cuts, revealed in last night’s fiscal statement will stimulate jobs growth, is actually continuing to undermine growth. The fiscal contraction implied by last night’s statement by the Federal Treasurer is modest next year and then gets sharper in the year after (2017-18). Many would conclude that the contractionary shift is benign. However, in the context that the strategy is being delivered, the actual need is for the discretionary fiscal deficit to rise by around 1 to 1.5 per cent of GDP, at least, not contract at all. The federal government has moderated its ‘surplus at all costs’ mania which dominated the macroeconomic policy debate a few years ago but is still aiming for a surplus (or close to it) within 4 years. It will fail in that goal because the non-government spending behaviour will not allow that outcome and the government’s own fiscal contraction over that period will undermine growth further. The early statements by the Federal opposition are also idiotic. It is claiming it would make ‘tougher’ decisions (that is, cut the deficit more sharply). That just means it would end up with higher levels of unemployment than the conservatives will under their current strategy. Both unemployment levels will be unacceptable. Neither major political party in Australia is fit for office!

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