Balancing budget over the cycle is not a sound fiscal rule
There were three data releases from the Australian Bureau of Statistics today and all showed that the Australian economy is continuing to weaken. The – Business Indicators, Australia – showed that company gross operating profits fell for the fifth consecutive quarter (7 our of the last 10). Second, the data for – Building Approvals, Australia – which is one indicator of the strength of the housing market and the construction industry, showed that the seasonally adjusted estimate for total dwelling approved fell by 2.4 per cent in January, the second consecutive monthly fall. Finally, the – Mineral and Petroleum Exploration, Australia – showed that “mineral exploration expenditure decreased by 10.2% in the December quarter 2012”. What this data tells us is that private spending is weak and probably weakening. It tells us that fiscal policy should be expansionary rather than following its present course of austerity. It tells us that unless the government reverses its current strategy, the Australian economy will weaken further. It also tells us that commentators and politicians that think fiscal rules such as “balancing the budget over the cycle” are sound strategies to adopt are either operating in a cloud of ignorance or deliberately misleading the public as to the likely outcomes that would follow from pursuing such a rule.