A far from wonderful set of growth numbers

The economy may have grown faster last quarter than business economists were expecting, but that tells you more about their forecasting ability than the economy's strength. Despite what Joe Hockey says, the numbers weren't all that wonderful.

According to the national accounts released by Bureau of Statistics this week, real gross domestic product grew by 0.9 per cent in the March quarter and by 2.3 per cent over the year to March.

This, of course, is well below the economy's "trend" (long-term average) rate of growth of 3 per cent a year, the rate needed just to hold unemployment steady in an economy with a growing number of people wanting to work.

But that's just the first reason the figures aren't as good as they initially appear. Another - one economists perpetually forget to remind us about - is that we have a population growing at the rapid rate of about 1.5 per cent a year, thanks to high immigration.

So we need quite a bit of growth just to stop average income per person falling. Turns out real GDP per person grew by just 0.8 per cent over the year to March.

Another thing to remember is that the growth in real GDP - the quantity of goods and services produced in Australia - is just one way, the most common way, of measuring economic activity.

It's usually assumed that the growth in the nation's production is the same as the growth in its income. But, first, the assumption breaks down if there's a significant change in Australia's terms of trade - in the prices we're getting for our exports relative to those we're paying for our imports.

That's because changes in our terms of trade affect the international purchasing power of the nation's income. When our terms of trade improve, the goods and services we produce are worth more when we buy goods and services overseas; when our terms of trade deteriorate, the stuff we produce is worth less when we're paying for imports.

With the prices we received for our mineral and energy exports rising greatly in the years before their peak in 2011, our "real gross domestic income" grew a lot faster than our production, real GDP.

Now, however, with coal and iron ore prices falling sharply, our real gross domestic income is growing much more slowly than our production, even falling. In the March quarter, real GDP grew by 0.9 per cent, while real GDI grew by only 0.2 per cent.

Over the year to March, real GDP grew by 2.3 per cent, but real GDI fell by 0.2 per cent. This matters because the real value of our income has an indirect effect on future real GDP, which is what drives growth in employment.

But a second assumption implicit in our almost exclusive focus on real GDP is that all the goods and services produced in Oz belong to Australians. They don't. In particular, maybe as much as 80 per cent of the value of the minerals and energy we produce and export is essentially the property of the foreign owners of our mining companies.

The Bureau of Stats highlights gross domestic product in conformity with international convention. But the fact is we'd be better off using gross national product, which measures how much of GDP actually stays with us rather than going to foreigners in interest and dividend payments.

And, because the deterioration in our terms of trade arises mainly because of the fall in prices of mineral exports, real GDI overstates the fall in our income. Real gross national income grew by 0.4 per cent in the quarter, and by 0.6 per cent over the year to March.

But, turning back to real GDP and its components, another reason the figures aren't as good as they appear is their heavy reliance on growth in exports. The volume (quantity) of our exports grew by 5 per cent in the quarter and by 8.1 per cent over the year to March.

This means exports contributed 1.7 percentage points to our overall growth of 2.3 per cent for the year. That's almost three-quarters of it.

Normally, this wouldn't be a worry. But when you remember that most of the export growth came from mining, and that mining is highly capital-intensive, you see there is a worry. It means that real GDP growth of 2.3 per cent isn't contributing as much to employment growth as we usually assume.

The figures show that the Reserve Bank's efforts to stimulate growth in the "non-mining" economy are having mixed success. They're working well with investment in new housing, which grew by 4.7 per cent in the quarter and 9.2 per cent over the year.

But they're getting nowhere with encouraging non-mining business investment to offset the sharp fall in mining investment. Overall, business investment fell by 2.7 per cent in the quarter and by 5.4 per cent over the year.

And get this: fiscal policy (including the budgets of the state governments) is hindering, not helping. Public investment in infrastructure fell by 2.4 per cent, its fifth successive quarterly decline, to be down by 9.1 per cent over the year, which subtracted 0.4 percentage points from overall growth over the year.

Consumer spending grew by an improved, but still below-trend, 2.6 per cent over the year, despite weak growth in wages and employment, and a rising tax bite from household disposable income.

What's keeping consumption reasonably strong is a falling rate of household saving. It fell from 8.8 per cent of household disposable income to 8.3 per cent in the quarter, down from 9.6 per cent a year ago.

It's normal and rational for households to adjust their saving to smooth their consumption spending as the economy moves through the ups and downs of the business cycle.

Even so, it's yet another respect in which the numbers weren't all that wonderful.

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A fair go for the poor should be above partisanship

There was one thing I liked about last year's unfair budget. Mesmerised as they were by the Business Council, Tony Abbott and Joe Hockey took leave of their political senses and were unfair to just about everyone, bar the well-off.

What's so good about that? Well, it meant the budget's unfair measures were overwhelmingly rejected by the public. No non-government-controlled Senate would ever have passed such measures.

It has taken most of the past year but, as we saw confirmed in this year's budget, Abbott has now abandoned or modified most of those nasties.

Trouble is – and this is my point – I fear Abbott and Hockey have now reverted to the standard cynicism demonstrated by their Coalition and Labor predecessors over the decades.

The fact is, most budgets contain unfair measures or continue unfair policies that should have been corrected, without arousing anything like the outcry last year's did.

Why not? Because most governments take care to reserve their unfairness exclusively for the poor and, in particular, for the people many Australians regard as the undeserving poor – the unemployed (who could all get jobs if they weren't so lazy) and sole parents (who are no better than they ought to be).

To most Australians, the only deserving poor are the elderly and maybe the physically disabled (provided their disability is clearly visible; anyone with a bad back is obviously a malingerer). The mentally disabled should pull themselves together.

Last year, when Abbott proposed to change the age pension from being indexed to wages (meaning it keeps up with incomes generally) to being indexed only to prices (meaning it doesn't) the public was outraged and the government has finally dropped the idea.

But the dole has been indexed to prices rather than wages for decades, causing it to fall further and further below the pension, without there ever being sufficient public disquiet to prompt any government – Labor or Coalition – to relent.

Governments of both colours have pushed people, mainly women, off the less inadequate "parenting payment" – what in less obfuscating days we called the sole parent pension – onto the more inadequate dole without any great protest from the public.

Of course, there are limits to our lack of charity towards the jobless. When, in one of his more notorious captain's calls, Abbott proposed denying every unemployed person under 30 access to the dole for six months of every year, we decided that was over the top.

But when the government relented and abandoned the idea in this year's budget, it replaced it with a plan for those under 25 to have to wait four weeks before their dole payments began, rather than the one week for everyone else.

Few people noticed, let alone cared. Yet no measure could be better calculated to make survival harder for people dependent on the dole. By the time the four weeks are up, any savings you may have had are gone, meaning that if some large unexpected expense arises you're done for.

Last week my co-religionists, the Salvation Army, reported the results of a survey of 2400 people from the 160,000 a year requesting emergency relief. Of those who responded to the survey, 88 per cent were on the dole, the disability support pension or the parenting payment. Only 5 per cent were employed and 4 per cent retired.

More than three-quarters were renters and 13 per cent were homeless. Respondents paid a median amount of $180 a week for accommodation, representing almost 60 per cent of their income. That left them with $125 a week – or less than $18 a day – to live on.

So their most pressing economic problems were the inadequacy of the benefit payments they received and the lack of affordable housing.

But this year's budget contained an initiative that deserves praise. The government has accepted the recommendation of the McClure review that it follow the New Zealanders by adopting an "investment approach" to welfare.

The idea is to use methods similar to those actuaries use to estimate risks and set insurance premiums to estimate the total amount of benefits likely to be paid to particular classes of welfare recipient over their lifetime.

Knowing how much it's likely to end up having to pay to support someone over the long term provides the governments with an incentive to "invest" in measures that will get them into lasting employment and thus save the taxpayer money.

If it encourages governments – and the Department of Finance – to be more far-sighted in their attitudes towards people on benefits, to spend extra money now to save paying more later, and to be more active in fixing people's problems rather than just passively handing out money, it will be a big improvement.

If, by quantifying the government's future liability if it fails to help people onto their feet, it encourages the politicians to do more evaluation of how well its programs work, and more experimentation to find what works and what doesn't, it will be a good thing.

You never know, it may even encourage politicians to be less cynical in their treatment of the poor and disadvantaged. To see concern about the poor the way someone who grew up in the Salvos would see it. To me, it's way beyond left and right.

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RECENT DEVELOPMENTS IN AUSTRALIA’S EXTERNAL SECTOR

UBS HSC Economics Day, Sydney, Tuesday, June 2, 2015

Australia’s external sector – measured by the balance of payments, the current account deficit and exports and imports – is an important part of the syllabus and, indeed, the economy. Australia would be a very much poorer country if we had no trade with the rest of the world or no flows of capital to and from the rest of the world. And yet with the exception of discussion of the terms of trade and the exchange rate, the external sector – and particularly the current account deficit and net foreign debt – is these days rarely mentioned in the economic debate, presumably because most economists don’t think there’s much there to worry about. But this lack of interest conceals the fact that, particularly in the years since the height of the global financial crisis in late 2008, the current account deficit has been a lot smaller, and the net foreign debt seems to have stabilised as a percentage of GDP.

Is the current account deficit a worry?

To many people anything called a ‘deficit’ must be a bad thing; all deficits must be bad, just as all surpluses must be good. But I trust you’ve learnt enough economics by now to know that sometimes deficits are good rather than bad, and sometimes surpluses are bad rather than good. It all depends on the economy’s circumstances at the time and whether a deficit or a surplus is more appropriate to those circumstances.

The fact is that Australia has run current account deficits in 128 of the past 150 years, which suggests such deficits can’t be too bad or by now we’d be in a lot more trouble than we are, and we don’t seem to be in much trouble at all. And, indeed, most economists think it’s a good thing rather than a bad thing for us to be incurring all those deficits. Why? Because what they mean is that Australia is a ‘capital-importing country’ and we’d be a poorer country if we weren’t.

Remember that if we’ve been running deficits on the current account of the balance of payments for all those years we must also have been running surpluses on the capital account of the balance of payments for the same period. The key to making sense of the current account deficit is to remember that, with a floating exchange rate, the current account deficit is at all times exactly offset by the capital account surplus. In other words, the current account deficit and the capital account surplus are opposite sides of the same coin. So the current account can be analysed by looking at its components: exports, imports and the ‘net income deficit’, which is our payments of interest and dividends to foreigners minus their payments of interest and dividends to us. Or it can be analysed by looking at the changes in the components of the capital account surplus.

Components of the capital account surplus

When you think about it, the capital account surplus represents the net inflow of foreign capital to Australia. Another way of putting it is that the net inflow of foreign capital represents our call on the savings of foreigners. And our call on the savings of foreigners represent the amount by which national investment during a period exceeds national saving during that period.

It’s become a lot more common these days for economists to explain movements in the current account deficit by reference to changes in national investment and national saving and their components, but we’ll have go at doing it both ways.

Before we do, however, let me finish the point about Australia being a ‘capital-importing country’ since the beginning of white settlement. The proof that we’re a capital importer is all those years of capital account surplus, of inflows of capital almost invariably exceeding outflows of capital. Why has all that foreign capital flowed into our economy? Because, from the outset, the opportunities for investment in the economic development of our vast, resource-rich country have always far exceeded the amount that Australians could save to finance the exploitation of those investment opportunities. So, from the outset, we have always invited foreigners to bring their capital to Australia and join us in developing our economy’s potential. And when inflows of financial capital exceed outflows, this allows us to import more than we export, including imports of the physical capital equipment need for new development projects.

Our current account deficits – and our foreign debt and other foreign liabilities – got a lot larger in the 1980s after we floated the dollar, much larger than we’d been used to. It took us a few years to realise that the international shift to floating currencies was part of financial globalisation – the growing integration of national financial markets – which was making it easier for financial capital to flow around the world and so achieve a more efficient allocation of global capital. Some countries (eg Germany, Japan) save more than they have profitable domestic development projects to invest in, whereas other countries (eg Australia) have more profitable investment projects than they can finance with their own saving. So both classes of economy should be better off as a result of higher flows from surplus economies to deficit economies.

Recent developments in the CAD and net foreign debt

Over the 30 years since the floating of the dollar in 1983, the current account deficit has averaged about 4.5 pc of GDP, with peaks of about 6 pc and troughs of about 3 pc. In the five years leading up to the GFC it averaged more than 6 pc, so it seemed to be getting a lot higher. As you see from the table, however, in the six financial years since the GFC, however, it has averaged 3.6 pc, close to the historical trough. And in the 2014 calendar year it was 2.8 pc.

As you also see from the table, the past decade shows our net foreign liabilities – that is, our net foreign debt plus net foreign equity investment in Australia – seem to have stabilised at about 55 pc of GDP. That is, the dollar value of our liabilities is now growing at about the same rate as nominal GDP.

Why has our current account deficit been significantly lower since the GFC, to the point where our accumulated foreign liabilities seem to have stabilised as a percentage of GDP?

Well, explaining it from the current account side of the balance of payments, our export earnings were at first boosted by the exceptionally high prices we were receiving for our exports of minerals and energy as our terms of trade improved to their best in a century or two. It’s true that prices reached their peak and started falling in mid-2011, but they remain much higher than they were in earlier decades. And the volume of our mineral exports has been growing particularly strongly in the past year or two as the many new mines and natural gas facilities we’ve been building have finally started coming on line and increasing their production.

Turning to imports, imports of capital equipment to be used in our new mines and natural gas facilities grew strongly for most of the period although, with the construction phase of the resources boom now coming to an end, imports of mining equipment are now falling sharply. And while mining construction has been strong for most of the past five years, consumer spending and business investment spending in the rest of the economy have been growing at below-trend rates.

Finally, remember that, because exports and imports offset each other, most of the current account is accounted for by the net income deficit. It has declined to its lowest percentage of GDP for several decades, mainly because Australian and overseas interest rates are so low.

But now let’s try to explain the decline in the current account deficit from the capital account side – that is, from changes in national investment and national saving. Remember that the nation’s investment spending in any year has three components: the household sector’s investment in new home building, the corporate sector’s investment in equipment and structures, and the public sector’s investment in new infrastructure such as roads, railways, bridges, schools, hospitals and police stations.

The nation’s saving in any year also has three components: saving by households, saving by companies and saving by governments. Companies save when they retain part of their after-tax profits rather than paying them out in dividends to shareholders. Governments save when they raise more in revenue than in needed to cover their recurrent spending (the spending needed to keep the daily activities of government rolling on).

Looking at national investment, households’ investment in new homes since the GFC has been weaker than normal, whereas the mining construction boom has meant corporate investment spending has been much stronger than usual. And government spending on infrastructure since the GFC has be greater than usual. Adding that together, national investment has accounted for a higher percentage of GDP in recent years.

Turning to national saving, households are saving a far higher proportion of their disposable incomes since the GFC, with the household saving ratio rising from zero or about 10 pc. Companies have been saving more as mining companies retain most of their after-tax profits for investment in their new projects and non-mining companies retain earning to reduce their ‘gearing’ (their ration of borrowed capital to shareholders’ equity). Only governments – federal and state – have been saving less – dissaving, in fact - as their budgets have fallen into recurrent (‘operating’) deficit. Adding that together, national saving has accounted for a much higher percentage of GDP in recent years.

So though national investment is higher than it was, national saving has increased by more than national investment has, meaning the economy’s saving/investment gap has narrowed, the capital account surplus is lower and so is the current account deficit.

The budget papers show the government is expecting a current account deficit of 3 pc of GDP in the financial year just ending, 2014-15, rising to 3.5 pc in the coming year, 2015-16, and then falling to 2.75 pc in 2016-17.

In the coming year, the government is expecting the volume of exports to grow by 5 pc, whereas the volume of imports falls by 1.5 pc, thanks to the lower dollar and weak imports of investment goods. However, the terms of trade – export prices relative to import prices – are expected to deteriorate by 8.5 pc. And the net income deficit will stay low because of low Australian and world interest rates, plus lower profits payable to the many foreign owners of our mining companies.

Financial year CAD NFD NFL

         % of GDP

04-05 6.5 46 55

05-06 5.8 49 54

06-07 6.1 49 57

07-08 6.7 51 56

08-09 3.4 49 55

09-10 5.0 52 58

10-11 3.1 48 54

11-12 3.3 50 56

12-13 3.9 52 55

13-14 3.1 55 55

Calndr 14 2.8 58 54

NFD = net foreign debt

NFL =  net foreign liabilities (debt + equity investment)

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RECENT DEVELOPMENTS IN MACRO MANAGEMENT AND THE POLICY MIX

June 2015

This year’s budget papers remind us that the Australian economy is entering its 25th consecutive year of growth since the severe recession of the early 1990s. This is the second longest continuous period of growth of any advanced economy in the world. What’s more, the government tells us, we are “one of the fastest growing economies in the advanced world”.

All this is true, but the fact remains that, though we escaped the global financial crisis and the Great Recession it precipitated, we’re making heavy weather of the transition from the resources boom to more broadly-based economic growth. We did get through the boom’s upswing - the huge surge in the prices of our exports of coal and iron ore and the equally huge surge in investment in new mines and natural gas facilities - without the great outbreak of inflation that had accompanied previous commodity booms. This was mainly because of the major appreciation in the dollar prompted by the big improvement in our terms of trade, and permitted by our floating exchange rate. This cut the price of imports and thereby encouraged greater “leakage” from the circular flow of income, as well as reducing the output of our other export and import-competing industries - particularly manufacturing and tourism - by making them less internationally price competitive. But we’re making heavy weather of the downswing as export prices fall and the boom in mining investment construction activity falls away sharply.

The economy’s medium-term average (or “trend”) rate of growth in real GDP is about 3 pc a year. This is also its “potential” rate of growth - that is, the average rate at which aggregate supply - the economy’s potential capacity to produce goods and services - grows each year. But the economy has grown by less than its trend rate for five of the past six years, and is now forecast to grow by only 2.5 pc in the financial year just ending, and by 2.75 pc in the coming financial year. Since our growing labour force means the economy needs to grow at its trend rate just to prevent the rate of unemployment from rising, unemployment has been creeping up since early 2011 from 4.9 pc to 6.2 pc, with the participation rate falling by 0.8 percentage points to 64.8 (with only part of that fall explained by the ageing of the population).

So what policies have the managers of the macro economy been pursuing to try to stimulate the economy to counter the slowdown in economic growth and prevent the rise in unemployment? Well, as has long been the usual policy mix, they have relied primarily on monetary policy, though fiscal policy has been playing a supportive role. Let’s look first at monetary policy, then at fiscal policy.

Monetary policy

Monetary policy - the manipulation of interest rates to influence the strength of demand - is conducted by the RBA independent of the elected government. It is the primary instrument by which the managers of the economy pursue internal balance - low inflation and low unemployment. MP is conducted in accordance with the inflation target: to hold the inflation rate between 2 and 3 pc, on average, over the cycle. The primary instrument of MP is the overnight cash rate, which the RBA controls via market operations.

After the GFC reach its height in late 2008, the RBA feared we would be caught up in the Great Recession that hit other economies, so it quickly slashed the cash rate from 7.25 pc to 3 pc. By October 2009, however, it realised we would escape the recession, so began lifting the cash rate from its emergency level, reaching 4.75 pc in November 2010.

In November 2011, the RBA decided the resources boom was easing and would not push up inflation. It realised growth in the non-mining sector of the economy was weak - held down particularly by the dollar’s failure to fall back in line with the fall in export prices – at a time when mining-driven growth was about to weaken. So it began cutting the cash rate, getting it down to a historic low of 2.5 pc by August 2013.

For the next 18 months the Reserve sat back and waited for this very low interest rate work through the economy and have its effect. Not all that much happened, with the economy continuing to grow at a below-trend rate. The dollar did start falling in the first half of 2013, and by June 2015 it had dropped to about US77 cents (from its peak of US1.10 in mid-2011), but this would have been explained much more by the continuing fall in coal and iron ore export prices than by our lower interest rates relative those in the major advanced economies. The Reserve continued to note that the exchange rate hadn’t fallen by as much as the fall in commodity prices implied it should have, explaining this as a consequence of the major advanced economies’ resort to “quantitative easing” (money creation), whose main stimulatory effect on their economies came by forcing their exchange rates lower (thus causing ours to be higher than otherwise).

So in February 2015, after a gap of 18 months, the Reserve began cutting rates, dropping the official rate another notch, and again in May, to reach a new low of just 2 pc. Will it cut rates any further? It will if it has to, but won’t cut again if it can avoid it. The Reserve is desperate to get the economy moving and growing at a rate sufficient to get unemployment falling rather than continuing to creep up. And the only instrument it has to influence the speed at which the economy is growing is interest rates. It would like to see its low interest rates encourage greater spending on new housing (which is happening) and, particularly, see them encourage greater investment spending by non-mining businesses to counter the marked fall in investment by the mining companies. So far, this is not happening.

But the extraordinarily low rates have encouraged a boom in the buying and selling of established houses, particularly by investors, which is pushing up house prices rapidly in Sydney and Melbourne, but less so in other capital cities. At the RBA’s urging, APRA - the Australian Prudential Regulation Authority - is trying to discourage excessive lending for investment housing by use of “macro-prudential” guidance of the banks, but it is too soon to say how effective this will be. The RBA is highly conscious of the danger of a house-price boom leading to a bust, which could damage individuals, hit confidence and even trigger a recession. Its problem is that interest rates are its only instrument for fostering demand.

Fiscal policy

Fiscal policy - the manipulation of government spending and taxation in the budget - is conducted according to the Abbott government’s medium-term fiscal strategy: ‘to achieve budget surpluses, on average, over the medium term’. This means the primary role of discretionary fiscal policy is to achieve ‘fiscal sustainability’ - that is, to ensure we don’t build up an unsustainable level of public debt. However, the strategy leaves room for the budget’s automatic stabilisers to be unrestrained in assisting monetary policy in pursuing internal balance. It also leaves room for discretionary fiscal policy to be used to stimulate the economy and thus help monetary policy manage demand, in exceptional circumstances - such as the GFC - provided the stimulus measures are temporary.

Mr Hockey’s first budget included many cuts in government spending, big increases in user charges for GP visits, pharmaceuticals and university education, a shift from indexing payments and benefits to wages to indexing them to prices, a return to indexing the fuel excise and a temporary deficit levy on high income-earners.

From a fiscal-policy perspective the first budget had two key features: 1) A slow pace of fiscal consolidation. Its new measures and revisions to forecasts were expected to do little to improve the budget balance in the first three years, but really cut in in the fourth year, 2017-18. This slow start was intended to avoid the budget having a dampening effect on growth while the economy was expected to be growing at a below-trend rate.

2) A switch in the composition of government spending. While spending on transfer payments leading to consumption was to be reduced, spending on infrastructure investment was to increase by $12 bil. About half this was to be spent on an ‘asset recycling initiative’ intended to encourage the states to increase their own infrastructure spending. The goal was to help fill the vacuum left by the fall in mining investment.

However, many of the proposed spending cuts proved highly unpopular with voters and many were voted down by the Senate. The government withdrew or modified many of them. The asset recycling initiative has not been taken up by most states.

Mr Hockey’s second budget, for 2015-16, seems aimed more at restoring the government’s political fortunes than at either advancing its efforts to return the budget to surplus or at using fiscal stimulus to supplement the efforts of monetary policy in getting the economy out of the doldrums. The budget has been packaged to make it look stimulatory - with increases in childcare allowances and, for small business, tax cuts and immediate full tax deductions for new business equipment costing less than $20,000 each. But, in truth, the budgetary cost of these measures was offset by savings from the decisions not to proceed with a more generous paid parental leave scheme or with a cut in the rate of company tax paid by big business. So the net effect of the discretionary measures announced in the budget will be neither expansionary nor contractionary.

That’s the strict Keynesian way to measure the “stance” of fiscal policy adopted in a budget. But the RBA assesses the budget’s implications for monetary policy using a simpler test which doesn’t distinguish between the cyclical and structural (discretionary) components of the budget balance. It just looks at the direction and size of the expected change in the budget balance. The budget deficit is expected to fall from $41 bil in the old financial year, 2014-15, to $35 bil in 2015-16, then to $26 bil, $14 bil and $7 bil in subsequent years.

Expressed as a percentage of nominal GDP, the government expects the budget deficit to fall by about 0.5 pc between the old financial year and 2015-16, and by about the same amount in each of the following three years. A change of 0.5 pc is considered to be right on the border between insignificant and significant in its effect on the economy. I therefor judge the policy stance adopted in the budget to be, at most, mildly contractionary.

New thoughts on the policy mix

Around the developed economies, it has been observed that monetary policy has become less effective in influencing demand as interest rates have got down to “the zero lower bound” and so many of them have had to resort to “quantitative easing” (creating money by having the central bank buy bonds from the trading banks and pay for them merely by crediting those banks’ accounts with central bank). Massive amounts of QE have pushed down those countries’ exchange rates relative to other non-QE countries, and pushed up prices in the markets for shares and bonds, but done little to stimulate demand. There is thus gathering support among economists for policy makers to make greater use of fiscal policy to get their economies moving, particularly by increased spending on public infrastructure.

Though Australia’s circumstances are very different to those in the major advanced economies, there are some obvious similarities. It’s clear that cutting the official interest rate from 4.75 pc to 2.5 pc between November 2011 and August 2013 did little to stimulate activity, apart from home building and house prices. And on several occasions Reserve Bank speakers have hinted that they’d appreciate more help from fiscal policy, presumably by increased spending on worthwhile infrastructure projects to fill the void left by mining projects.

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