Thursday, May 14, 2015
The zero lower bound government
Another budget has been and gone. Instead of the steaming turd that was the last budget, which was largely blocked by the Senate, this time we have zero. The Abbott government has spent the intervening period announcing bad policies, extracting the maximum amount of negative reaction as the public gradually and painfully rejects them, and then quietly dropping them. What they are proceeding with are much the same settings as were left by Swan, but adding a bunch of conservative nudge items which blow the deficit out. Hockey is deliberately doing nothing in the hope that revenues will rebound naturally from historic lows under Swan.
For me, the most astounding stat from this year's budget is that despite a projected deficit of over $35B, it will actually create an annual lag on the economy of as much as 0.5% of GDP (read it somewhere yesterday, now can't find the link, grr), and will do nothing to help slowly creeping unemployment. From a Keynesian macro perspective, it is the worst outcome possible. Most worryingly, it is based on assumptions that are rosy at best.
Australia under zeroed interest rates would be a scary place, given how our economy is structured so strongly around housing as a speculatory tax haven. If, as some pundits are saying, this budget is a precursor to an early election, that may be the last chance to avoid the unhappy fate of the ZLB. The Liberals don't have any ideas.