Game of Theories: The Great Recession
06 Dec 2017 Leave a comment
in budget deficits, business cycles, Euro crisis, fiscal policy, global financial crisis (GFC), great recession, macroeconomics, Public Choice, rentseeking
Debt repayment does not rule out tax cuts
20 Jul 2017 Leave a comment
in budget deficits, politics - New Zealand, public economics
The case for a tax cut is a distinct issue from repaying the recent large budget deficits and balancing the budget over the business cycle.
Ministers of Finance should pay more attention to the concept of tax smoothing. Unless something special is happening, income tax rates should be similar from one year to another. We should keep tax rates fairly smooth by borrowing during recessions and emergencies.
Instead, the Government not indexing the income tax thresholds for inflation collected $2.1 billion in extra revenue since 2008 according to Parliamentary Library calculations. Raising the income tax rate thresholds is becoming more pressing. Income growth is starting to push many ordinary taxpayers uncomfortably close to the next threshold and a much higher marginal tax rate. For example, 30% rather than the 17.5% income tax rate many taxpayers face.
New Zealand is already left behind on company tax rates; ours is currently 28%. The Australian company tax rate may drop to 25%; the British company tax rate is going down to 17% by 2020.
Large public deficits have their place
Prudent public debt management dictates that governments run temporary budget deficits in recessions and other emergencies such as the Canterbury earthquake and repay that debt as better times return. Recessions and natural disasters are infrequent so this extra debt should be paid down at a measured speed, not a frantic pace at the expense of other tax policy goals.
An increase in the budget deficit smooths over these bad times and avoids taxes going up and down like a Jack-in-the-Box over the business cycle. Who raises taxes in a recession?
Beware of foul-weather fiscal conservatives
After the start of the recession in 2009, foul weather fiscal conservatives wanted to do just that. The same usual suspects who always advocate bigger government argued for higher taxes rather than running a larger budget deficit, which New Zealand did. Imagine the massive income tax rises required every recession and in the last recession in particular if the large budget deficits were not run?
The large public debt from the temporary budget deficits that smoothed over the last recession is no special or additional reason to postpone income tax cuts. A sound long-term fiscal strategy has tax rates at levels that make up on the deficits in bad times with surpluses in the good times. Slowly repaying debts accumulated in a recession is a routine part of prudent public debt management.
There is room for tax cuts
Every budget allocates about $1.5 billion for new policy proposals that can be adopted without the Treasury thinking that they might harm long-term fiscal stability.
New Zealand budget allows for up to $1.5 billion on new policies every year. If this new spending was justified despite the large public debt from the recent recession, some tax cuts are too. They could start with raising the income tax rate thresholds to make up for past inflation.
Edward C Prescott on the EU, business cycles and European economic research
07 May 2017 Leave a comment
in budget deficits, business cycles, economic growth, Edward Prescott, macroeconomics Tags: real business cycle theory
Monetary policy versus fiscal policy | Finn E. Kydland
21 Nov 2016 Leave a comment
in budget deficits, business cycles, economic growth, fiscal policy, macroeconomics, monetary economics Tags: Finn Kydland
The Broken Window Fallacy
26 Oct 2016 1 Comment
in budget deficits, business cycles, economic growth, economics, fiscal policy, macroeconomics Tags: crowding out
General government net financial liabilities as % Portuguese, Italian, Greek, Spanish and Irish GDPs
03 Jun 2016 Leave a comment
in budget deficits, business cycles, economic growth, economic history, Euro crisis, financial economics, fiscal policy, global financial crisis (GFC), macroeconomics Tags: Greece, Ireland, Italy, Portugal, public debt management, sovereign debt crises, sovereign defaults, Spain
I had borrowed a lot of money from scratch after 2007. Greece borrowed a lot of money of its own accord from 2010. Italy always owed a lot of money. Spanish do not know all that much money considering their dire financial circumstances.
Source: OECD Economic Outlook June 2016 Data extracted on 01 Jun 2016 12:57 UTC (GMT) from OECD.Stat
General government expenditure and general government revenue as a % of Australian and New Zealand GDP since 1970
13 Mar 2016 Leave a comment
in budget deficits, economic history, fiscal policy, macroeconomics, politics - New Zealand, politics - USA, public economics Tags: Australia, growth of government, size of government
I do not trust the numbers for New Zealand prior to the early 1990s released by the OECD. New Zealand simply did not have a tax structure including a GST in the double digits back then to support estate of that size. Nonetheless, the size of government in New Zealand is systematically larger than in Australia, a richer country which can afford a large government and generous welfare state.
Source: General government – General government revenue – OECD Data and Data extracted on 12 Feb 2016 08:45 UTC (GMT) from OECD.Stat from OECD Economic Outlook November 2015.
General government spending and general government revenue as % of US GDP since 1970
12 Mar 2016 Leave a comment
in budget deficits, economic history, fiscal policy, politics - USA, public economics Tags: growth of government, size of government
Source: General government – General government spending – OECD Data and Source: General government – General government revenue – OECD Data.
The modern macroeconomics of the Global Financial Crisis
02 Dec 2015 Leave a comment
in applied price theory, budget deficits, business cycles, economic growth, economic history, economics of regulation, Euro crisis, fiscal policy, global financial crisis (GFC), great depression, great recession, macroeconomics, monetary economics Tags: adverse selection, bank panics, bank runs, banking crises, deposit insurance, economics central banks, financial crises, moral hazard, sovereign defaults
Utopia, you are standing in it! 
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