Monday, May 12, 2014

Unicorn rainbows and the LDP budget

The Liberal Democratic Party released its alternative budget today in the Fin, amid about as much fanfare as the alternative Tea Party version of the annual State of the Union address and with as little impact. Among the highlights:

  • A ridiculous application of the discredited Laffer curve theory with the assumption that cutting the top marginal tax rate to 33% would mean only a $3B hit to government revenues but would add over 1% to GDP growth;
  • An unsupportable application of a flawed study by Andrew Leigh (since comprehensively debunked on scientific grounds) to claim that freezing the minimum wage would lead to the creation of 100,000 or more low-paid jobs;
  • A laughably bare assertion that the government can arbitrarily cut public sector wages by 10% without incident;
  • No modelling of the effects on domestic demand of such massive changes as adding the family home to the pension asset test, or reducing multi-billion dollar subsidies for education and R&D overnight, among other changes amounting to cutting public sector spending by 10%.

If anyone thought that the LDP was ready to govern with a coherent set of economic policies, think again. I have sympathy for the message of attacking rentseekers, but you can't assume away the removal of around 3% of domestic consumption and hope that magical pink unicorns will somehow descend from the nearest cloudbank to fart out enough demand rainbows to make up the inevitable shortfall in government revenue.

I realise this is just an intellectual exercise and it's better than most other minor parties are prepared to do, but if you're going to go to the trouble of preparing an actual Budget then you should show some semblance of connection with economic reality. There are ways to do these things without dropping the country into its first recession for over two decades.


  1. A complete joke. you cut public expenditure this much when nominal GDP growth is so weak then you get a weaker economy just lie happened to Wayne Swan.

    Only those who are mentally incapacitated could support this rubbish!

  2. The dynamic tax analysis used an elasticity of taxable income of 0.6 for high-income earners and 0.4 for the 2nd bracket, which is consistent with the research of Saez (a pro-tax professor at Harvard) and the recent evidence from the UK, and is at the lower end of most estimates. No serious economist seriously thinks the ETI is zero, and it is apparent that you are totally ignorant of the ETI literature. You're embarrassing yourself.

    Leigh responded to the paper by Watson, finding that his results were robust to a number of different specifications. Harding & Harding found a similar result. And even if you arbitrarily reduce their estimated elasticity of -0.29 then the underlying story remains. You're embarrassing yourself further.

    While it is true that budget changes will change the make up of demand, unless you are predicted a huge change in broad money supply then there is no rational reason to assume a drastic change in aggregate demand. Your comments suggest utter ignorance of how open-economy macroeconomics works and so are embarrassing yourself even further.

    Want to try again?

  3. The Leigh response:

  4. The Laffer curve is largely apocryphal, Muppet. The notion that lowering tax would increase government revenue under normal circumstances is junk economics.

    We saw a nice little experiment recently in Queensland. Newman slashed public sector spending, demand fell, the state went into an immediate recession. Substitution is a myth in the short term, yet more magical thinking by the loopy right.

  5. Actually I agree the Leigh paper is a good one and his reply is also.

    Howard boasted in the 2007 election campaign we had the highest minimum wages in the OECD

  6. As Homer keeps pointing out, Swan's contractionary budget also contracted the economy by almost a percentage point.

    Contractionary fiscal policy is contractionary. Any other conclusion is a distraction.

  7. Nominal GDP growth is well below trend. Impose a more contractionary budget than Swan did and then you have to argue where is the increase in demand to offset this going to come from?
    Cash rates falling from 2.5% to? don't think so.
    A lower exchange rate well quite possibly but the exchange rate has been well above its PPP 'rate' for some time.
    Expansionary austerity ONLY works when Keynes says it does. In very good times like we saw with Keating in 1987 or Costello in 1996 and neither of those budgets got near Swan's.