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The most important chart in the budget

Tucked away in Budget Paper Number 1 is a fascinating little chart that is arguably the most politically important piece of data in the entire budget, as it justifies not just the very existence of the stimulus program and the political baggage that is coming with it, but also shows the likely consequences of the alternative “what if the stimulus was smaller or didn’t exist” scenario.

You can see the Treasury version of the chart over in Statement 2 of Budget Paper No. 1 – “Box 4: Economic growth and fiscal stimulus”. However, that treasury graphic is a bit of a chartcrime, so we can reproduce it ourselves from the raw data cited in the budget papers.

Back in early 2009, the IMF made GDP forecasts for a number of countries based on what the prevailing economic outlook was for those countries at the time that the forecasts were made. Those early 2009 IMF forecasts came in like this:

During the period between when these forecasts were made and today, these nations deployed fiscal stimulus packages of varying sizes. You can see the size of the stimulus packages as a proportion of GDP in the table on page 36 of this IMF document – under the 2009 column “Crisis related discretionary measures”. This was the size of the stimulus packages for each of these nations as a proportion of GDP:


The third and final piece of data we need is the actual growth achieved by these nations in 2009, which the IMF also provides over here.

This is what they come in as (using last night’s Treasury data to substitute for the Australian entry):


So what was the impact of the stimulus on GDP growth across nations? To find out, if we subtract the 2009 IMF forecast growth from the actual growth achieved in 2009, it tells us the forecast error – or the amount by which the original GDP forecast for each nation was out.

That then allows us to compare the size of the various stimulus packages to the size of those forecasts errors via a scatter plot and regression – if the stimulus packages explain the forecast errors (in that, the bigger the stimulus package, the better the economy performed over its original forecast), then we should see a tight linear relationship with nations starting in the bottom left hand corner (representing small stimulus and small errors) going roughly linear up until the top right corner (representing large stimulus creating large forecast errors).

So what does the chart look like?


This is a very statistically significant relationship (albeit with only 11 observations), with the budget papers stating that the T-stat on the stimulus package coefficient was 3.3. Using the raw data, my results confirm that – here’s the regression output:


What this chart demonstrates is that the size of the stimulus packages mattered – seriously mattered. The larger the stimulus package, the better a country performed compared to what its original IMF growth forecasts suggested.

The stimulus packages made a clear difference to the size of GDP growth. The size of the packages made a clear difference to the size of the effect on GDP growth.

As the effect was consistent across nations – we can use this data to get an approximate estimate of what actual Australian GDP would have looked like in 2009 as a function of the size of a spectrum of stimulus package sizes.

If we treat the regression line in the above chart as an approximate estimate of the stimulus effect on GDP, we can slide Australia up and down that line according to hypothetical stimulus packages of different sizes, and recalculate the left hand vertical axis to represent Australian GDP rather than the forecast error.


According to IMF data and the consistency and significance of the stimulus/forecast error relationship, a stimulus package in Australia around the 2.2% of GDP would have given us zero growth – anything less than that would have delivered us negative growth.

When the Coalition says the stimulus package should have been smaller – they need to be asked how much smaller. Every drop in GDP causes an increase in size of unemployment. How many more people would they have been willing to throw on the scrap heap of unemployment in their pursuit of a smaller package?

Every time the Coalition complains about debt, they need to be asked how much smaller they believe the stimulus package should have been and how many more people would they have been willing to throw on the scrap heap of unemployment in their pursuit of a smaller debt load.

Debt was the cost of growth – growth was and always is the provider of jobs. Pretending that less debt could have provided the same jobs is fairy floss economics. A dollar is a dollar is a dollar.

The size of stimulus packages mattered – the international evidence is in.

The Coalition needs to be questioned about its economic viewpoints – viewpoints which are far from mainstream economics, existing on the very fringes of economic debate and which are completely at odds, completely and utterly at odds, with the international empirical evidence.

You know what an argument without evidence is called?

Making shit up.


Sinclair Davidson (which some of you may remember from one of the funniest exchanges in Senate Estimates history with Doug Cameron!) over at Catallaxy has redone the same chart with more than just this G7 plus selected countries, but expanded it to the whole G20, finding much more variation in the results, leading to a crashed significance and much reduced slope on the regression line over the full G20 spectrum.


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  • 1
    David Sanderson
    Posted May 12, 2010 at 10:07 am | Permalink

    The chartmaster strikes again – great stuff. You almost make me wish I had done stats at uni.


  • 2
    Posted May 12, 2010 at 10:11 am | Permalink

    Some good analysis there; does paint a pretty clear picture of the effect on growth of the stimulus. Your last chart though – est. GDP growth under different stimulus sizes – the 2.90% actual stimulus doesnt seem to marry up with the 1.40% actual growth.
    Looks closer to .75%? I’m probably fiddling at the margins so to speak but what you say is 100% correct. Will be very interested to hear the libs response tonight.

  • 3
    Posted May 12, 2010 at 10:13 am | Permalink

    Henry, that’s because the actual Australian data came in slightly above the actual regression line – as you can see in the chart where we sit a bit above the blue line.

    The blue regression line is the trend line, with each nation being distributed above and below it.

  • 4
    Posted May 12, 2010 at 10:20 am | Permalink

    Probably harder to check out, but I’m betting that Henry’s advice to the Government about “going early” – given that it was taken – was effective as well. What was it? Something like “Go early, go hard, go households.”

    Timing might not be everything, but it has its supporters.

  • 5
    Posted May 12, 2010 at 10:25 am | Permalink

    Firstly on the quality of the IMF forecasts. According to the chart about 1% stimulus was necessary just to meet the IMF forecast, suggestion if anything the IMF was slightly optimistic.

    Possum another possible inference is that Australia, Korea, France and Brazil’s stimulus packages were more efficient than average. While the UK stimulus package in particular was rubbish. Korea seems to be a good example of a big stimulus helping the economy to avoid calamity (not sure how Korea is doing now, but those figures suggest it could have been as bad as the UK otherwise).

    So despite the screw-ups it looks like the Australian stimulus package was less wasteful than most.

  • 6
    Posted May 12, 2010 at 10:26 am | Permalink

    thanks Possum, so I’m confusing my actuals with my regressions. Now I remember why I didn’t study stats..
    You should flick a copy of this to Swan and co (not to mention hacks like Shanahan and co.). This sort of analysis should be blowtorch to the belly stuff for the libs.

  • 7
    Posted May 12, 2010 at 10:27 am | Permalink

    You’ve done it again!
    Now for the hard work to get such empirical data and anaylsis into the MSM.

  • 8
    Posted May 12, 2010 at 10:28 am | Permalink

    Come on media, get on board, knock the wind out of the wind-bag. Discover if there is any substance in there, or is it just spin? Lazy media are just as big a threat to Australia’s progress than ineffective opposition. An opposition with no substance will be a dismal government if elected.

  • 9
    Posted May 12, 2010 at 10:32 am | Permalink

    Excellent as usual.

    What also caught my eye was the performance of relatively resource rich Brazil (perhaps above “trend” like Oz because of this) and Canada (perhaps below trend due to their proximity to BNA)

  • 10
    Posted May 12, 2010 at 10:40 am | Permalink

    I don’t think there can be any argument that the stimulus played a large part in avoiding recession in Australia. The exact perfect size is difficult to determine – almost impossible in advance.
    But I think the questins remains, in the long term, could we afford it or was too much spent and we would actually have been better to suffer recession and not burden our children.
    It looks like we lucked out and China means we can repay the debt.
    But I think the size of the stimulus package means that the Lucky Country really was bloody lucky this time around.

  • 11
    marshall hughes
    Posted May 12, 2010 at 10:45 am | Permalink

    Nice chart, but considering the IMF hasn’t got a single prediction right for the last 10 years, it’s useless to base anything on their forecasts.

    The answer to the question: “what if the stimulus was smaller or didn’t exist” is this:

    No one knows.

    Now get back to work and start paying off the debt.

  • 12
    Posted May 12, 2010 at 10:51 am | Permalink

    Lannie, one of the issues with the “smaller stimulus” argument that is rarely given the air time it deserves is that it also develops budget costs of its own.

    For instance, over here we took a look at the way uneployment paths with recessions track:

    A smaller stimulus means more unemployment – where that unemployment takes a long period to remove, and where it also carries costs to the government (both in terms of increased welfare outlays *and* reduced income tax receipts).

    So having a smaller stimulus package wouldnt have led to an amount of debt smaller by the size of the difference between the two packages, debt would have reduced with a smaller stimulus package, but also increased (as deficits occurred) as a result of more unemployment, less income tax receipts and generally less aggregate demand in the system.

    Combine that with the long term costs of greater unemployment (where the types of pathways are highlighted in that link), and it’s not at all certain whether a smaller package would have actually produced a smaller overall debt position.

  • 13
    Posted May 12, 2010 at 10:56 am | Permalink

    Marshall went:

    Nice chart, but considering the IMF hasn’t got a single prediction right for the last 10 years, it’s useless to base anything on their forecasts.

    Last 10 years?

    I must be looking at a different IMF to you. Maybe you’re thinking about this lot? :-P

  • 14
    Posted May 12, 2010 at 11:02 am | Permalink

    Possum wrote:

    The Coalition needs to be questioned about its economic viewpoints

    Their ABC has them as “guests” in EVERY news and current affairs program. Turn on their news bulletins any time and it’s utterly full of the phrase:

    The Federal Opposition says …

    I have never SEEN an Opposition get SO MUCH access to the ABC. It’s getting to the point of being ridiculous. Saturation stuff. You cannot turn ON the radio or television without being subjected to some Coalition dork or other chanting slogans and spiteful talking points.

    Yet in all this, they are allowed to spin vile lies and rarely get pulled up on them! What’s going on? Come on, ABC, do your bloody jobs!! You are not there to provide a feathered platform for mendacious, ideologically-radical spin-titans to walk all over you and the audience.Take the Lieberals to task … or be held as part of the problem.

  • 15
    Posted May 12, 2010 at 11:14 am | Permalink

    Superb work Poss. despite teh claims of some here your methodology is good too. There was a very relevant thread on Paul Krugman’s blog around November 2008 debating how big the US stimulus needed to be. He concluded it was better to err on the high side, and suggested betwen 2% and 4% of GDP. Ken Henry must have been reading. Your analysis shows both were right.

    I wonder how many of the budget critics have even read the supporting papers?

  • 16
    Posted May 12, 2010 at 11:16 am | Permalink


    Socrates wrote at Poll Bludger:

    The budget really is a rather bland document, so I think it tends to bring out the biases of the reviewer in how it is described. The ABC says Swan’s “No Frills Budget Fails to Thrill”. They then quote some citizens who have a Barnaby Joyce-level of understanding as “evidence”. This rubbish needs to be countered in simple terms.


  • 17
    Posted May 12, 2010 at 11:17 am | Permalink

    Incidentally, I think you can also advance obvious reasons why some stimuli packages were less successful than others. UK, US and Canada all plugged large amounts of cash into the private banking system in the false hope that they would use it to stimulate private investment activity. Australia, Korea and France all mostly put it into private works. (I don’t know what Brazil did). The trend is clear.

  • 18
    Posted May 12, 2010 at 11:23 am | Permalink

    Bushfire Bill wrote at The Political Sword:

    Also on ABC’s AM this morning, Swan was on the program, but only in snippets, there only to punctuate Opposition demands and comments.


  • 19
    Posted May 12, 2010 at 11:25 am | Permalink

    Good analysis Poss. I think that the tie in between stimulus large and EARLY and keeping the unemployment rate down EARLY in a recession should be one of the big political drivers this year, but few of the MSM commentators seem to be picking up on that. George M would be the exception here.

    thanks for that.

  • 20
    Posted May 12, 2010 at 11:27 am | Permalink

    Possum’s size / effect analysis of the Stimulus Package is very convincing.
    Would the quick deployment of the package have had a significant effect ?
    Enough to counter the opposition carping about it being rough around the edges ?

  • 21
    Posted May 12, 2010 at 11:28 am | Permalink


    Purely as a suggestion, you could also chart the timing of the mining boom with the stimulus and Australian GDP growth. I suspect it will show clealry that it was the stimulus and not the mining boom that coincided with our dodging recession. Those who claim mining saved us rom the GFC are wrong – the timing does not fit. Put simply, the mining industry too had stopped growing during the GFC. The difference was the stimulus.

  • 22
    Posted May 12, 2010 at 11:33 am | Permalink

    Is it possible to now update your original charts in ‘Dishonesty and the Paths of Unemployment’ to reflect current reality and further prove\disprove that hypothesis.

  • 23
    Posted May 12, 2010 at 11:35 am | Permalink

    Cuppa: Yet in all this, they are allowed to spin vile lies and rarely get pulled up on them! What’s going on? Come on, ABC, do your bloody jobs!!

    Couldn’t agree more. The conservative board members are certainly having an effect on the ABC bias. Thank the gods for Crikey.

  • 24
    Posted May 12, 2010 at 11:38 am | Permalink

    Clarity personified (or, maybe Possumified?), and pretty much what I thought intuitively from knowing which economies had done well and pumped big stimulus packages. (hey, ‘stimulus package’ is on my Crikey coffee mug, so it’s always to my lips!).

    So nice to see it presented in such clear graphical form. Do you think Shamaham could understand it? Of course Mega George could, but he’s not allowed to write shameless counter-factual opinion pieces like the Shamster.

    Maybe send it over to Liteline (sic), they could do with a bit of support on the numbers front. Pretty much a gravitas free zone on the Abe, unless you count the mock seriousness with which they echo the Opposition’s talking points.

  • 25
    Posted May 12, 2010 at 11:41 am | Permalink

    Runim went:

    Is it possible to now update your original charts in ‘Dishonesty and the Paths of Unemployment’ to reflect current reality and further prove\disprove that hypothesis.

    Neat idea. Fortuitously, tomorrow the ABS releases the April Labour Force Figures – so I’ll get onto it tomorrow sometime.

  • 26
    Posted May 12, 2010 at 11:45 am | Permalink

    I’d concur with runim @ 23 Poss. Redoing that Sept post to reflect the actual unemployment numbers to date would be interesting.

    Don’t suppose it would be possible to include comparative data from some other countries?

    Would be interesting to see if that would give any kind of indications for how long it is likely to take some of those countries to come out of recession.

    Maybe countries like Spain with 20% unemployment??

  • 27
    Posted May 12, 2010 at 12:03 pm | Permalink


    It seems like you’ve just spent 800 words and evidently expended a fair amount of effort proving something any year 11 economics student will tell you; larger fiscal stimulus will have a direct effect on growth. I really don’t understand how or why people are arguing that it wouldn’t. As you stated above a smaller stimulus would have been counterproductive due to the negative effect on revenue and employment.

    Although its counterintuitive if you’re going into deficit as a countercyclical policy the more you spend the more you get per $ borrowed. A smaller stimulus would have reduced the benefit by more than the reduction in the amount borrowed due to the multiplier effect. It makes perfect sense that those who could stimulate heavily did well, the key is having a healthy balance sheet in the first place.

    Now, could the stimulus have been spent in a way that netted better long term (non countercyclical) gains? That’s a serious question.

  • 28
    Posted May 12, 2010 at 12:12 pm | Permalink

    Possum, any chance you could expand on the “chartcrime” observation?

  • 29
    Robert Lukins
    Posted May 12, 2010 at 12:15 pm | Permalink

    Cheers as always Poss: great graphing, tops wording, effective swearing.

  • 30
    Posted May 12, 2010 at 12:15 pm | Permalink

    Autocrat – it’s just dreadful on the eyes, although not as bad as some other examples we’ve seen:



  • 31
    Posted May 12, 2010 at 12:18 pm | Permalink

    Lucky I didn’t have a teaspoon handy.

  • 32
    Posted May 12, 2010 at 12:22 pm | Permalink

    The media’s heavy coverage of the Opposition’s views enables them to claim that their coverage is ‘balanced’.

    Where I believe our democracy has become a bit of a sham is that this ‘balance’ effectively avoids almost any mention of any progressive alternatives to Labor.

    Most people also have very little idea of how Australia compares to the rest of the world in allocation of budget resources. This enables both Liberal and Labor to continue the myth that we are fairly centre in our allocations when in fact on the world scale we are very right wing loonies. (Sensible right wing can spend on research and environment.)

    Even though The Greens have proven that often they are more economically sensible than either of the major parties, the economic reporting by the media almost always limits coverage of The Greens response to the budget to environmental matters.

    A stimulus package was necessary. The big debate should have been about how the stimulus was spent. There was an opportunity to do so much which has been squandered.

  • 33
    Posted May 12, 2010 at 12:23 pm | Permalink

    Great analysis Possum. Some potential future uses: Can you tell us from this what the impact of the Greek counter-stimulus is likely to be on the Greek economy?

    OBlizzard says “I really don’t understand how or why people are arguing that it wouldn’t.” Because they believe, or profess to believe, in the “Ricardian equivalence” fallacy.

  • 34
    Posted May 12, 2010 at 12:31 pm | Permalink

    Good work, Poss. Tip of the hat to you.

  • 35
    Posted May 12, 2010 at 1:00 pm | Permalink

    Good analysis poss, but I think that China’s stimulus would have contributed around half the +ve GDP result and would have also helped Brazil & Canada’s economy’s good GDP results. China stocking up on resources certainly helped keep the dollars coming into the economy here.

    The stimulus was the right thing to do but I think Labor squandered an opportunity to invest heavily into nation building (critical infrastructure upgrades, etc.) rather than randomly splash cash into the economy for short term effects and on dubious projects.

    I don’t think you give enough credit to the prior government leaving Labor with a surplus, which left us in better shape to combat the GFC with stimulus spending. With the USA & UK having huge government borrowings before the GFC, they were in a position of weakness with their stimulus packages as they were handicapped by massive deficits already.

  • 36
    Posted May 12, 2010 at 1:00 pm | Permalink

    Poss, Brilliant as usual.

  • 37
    Posted May 12, 2010 at 1:03 pm | Permalink

    interesting post,

    something for all economic correspondants, and politicians to have seared into their heads,

    that is, in national income accounting terms,

    the government financial deficit is equal to the private sector financial surplus, and visa versa,

    everytime a government runs a surplus it draws savings from the private sector.

    why is this a problem,

    well, if the government doesnt spend enough to satisfy the spending and investment desires of the private sector, those desires have to be met by private debt markets, and this process cant go on indefinately, eventually effecting domestic demand, and further impairing private sector balance sheets.

    given our private sector debt levels, we need to get rid of this nonsensicle notion of the government needing to get into surplus as soon as possible. it is unsustainable, in that what is required for the next few years is for the government to spend money without liability, run deficits large enough to employ all available resources, and hence allow the private sector to improve their gearing and balance sheet position.

    going into surplus too quickly in the expectation that credit driven domestic demand will drive the economy only guarantees that we will have our own financial crisis within 10 years , but with much greater levels of debt, assuming that the credit markets wont develope greater risk aversion to such a proposition.

    the reality of national income accounting, indicates that the only countries that should be running budget surpluses are trade surplus countries, no one else.

    all financial transactions in the private sector nett to zero. the only entity that can add nett financial assetts to the total economy is the government, thus allowing the private sector to repair and improve their balance sheet position, and maintain full employment.

    under national income accounting rules, recessions are voluntary. the only reason we have recessions is that government deficit spending over and above the automatic stabilisers in play, is insufficient to counter act the savings desires of the private sector.

    it constantly staggers me, that economic commentators in the media totally missundestand the difference between household budgetary constraints and government budgetary finance. the government soveriegn in its own currency, has no budgetary constraint, no intergenerational financing problem, and can never be insolvent.

    if we want the private sector to prosper and for all of us to still have jobs, then the government has to run appropriate deficits.

    its clear to me that mr costello and now mr swan and all their advisors do not understand national balance sheet accounting, let alone the intimate connection between budget deficits and private sector balance sheets

  • 38
    Posted May 12, 2010 at 1:04 pm | Permalink

    Can you tell us from this what the impact of the Greek counter-stimulus is likely to be on the Greek economy?

    Paul Krugman and others ave already commented on that. He doesn’t think Greece will escape a debt spiral: the cuts in government spending needed to reign in debt will in turn reduce GDP and tax receipts making it even harder to pay off the deficit.

  • 39
    Posted May 12, 2010 at 1:06 pm | Permalink

    “China’s stimulus would have contributed around half the +ve GDP result and would have also helped Brazil & Canada’s economy’s good GDP results.”

    Very probably right. Politically, it makes what Rudd was doing when he was being panned in the media for being “Kevin 747” and attending all those G20 meetings and suchlike seem a lot more valuable. If the response to the GFC had not been a pretty much coordinated international effort, we would have not come out of it as well as we have so far.

  • 40
    Posted May 12, 2010 at 1:08 pm | Permalink

    The analysis only makes sense if ‘Actual’ stimulus spending as % of GDP is included. As I see it the actual figure you have is the GDP growth for Australia as per Treasury, all the others are estimated or projected numbers. One apple amongst a whole bunch of oranges.

  • 41
    Posted May 12, 2010 at 1:17 pm | Permalink

    mwr says “all financial transactions in the private sector nett to zero”. How can this be when banks charge more in interest than they loan out or pay to depositors? Surely all transactions in the private sector net to negative?

  • 42
    Posted May 12, 2010 at 1:20 pm | Permalink

    John went:

    The analysis only makes sense if ‘Actual’ stimulus spending as % of GDP is included

    The fiscal stimulus measures are what the IMF estimates as being “actual” crisis related discretionary measures, derived from October 2009 World Economic Outlook reporting.

    On the final GDP figures, Brazil and China are the only IMF estimates for actual 2009 numbers -yet those estimates are based on the latest available data. i.e. 2009 data itself.

  • 43
    Captain Col
    Posted May 12, 2010 at 1:21 pm | Permalink

    Surely your figures only prove that the stimulus worked for the short term. What is the effect of the massive government debt as either an opportunity lost or a constraint on future budgetary discretion? Economists always advocate ‘good’ debt in preference to ‘bad’ debt. In this stimulus activity the government has not produced the degree of value for money such that the resulting debt could be classified as ‘good.’ In other words where are the income producing assets in return for the debt?

    The other effect of a recession in the capitalist sense is to clean out the deadwood by allowing unviable businesses to fail or be restructured for improved performance.

    How do you graph that? And I admit I’m not an expert, so go easy on the insults.

  • 44
    Posted May 12, 2010 at 1:26 pm | Permalink

    “I have never SEEN an Opposition get SO MUCH access to the ABC. It’s getting to the point of being ridiculous”

    access isnt the problem, its the total utter nonsense mr abbott and mr joyce sprout out about debt.

    they clearly do not understand treasury and rba operations.

    a government with debts denominated in its own currency can never go insolvent, and debts can be paid in a blink of an eye. what do we think would happen if chinese US treasury holders wanted their greenbacks back tomorrow. well the fed would just make adjusting entries in the appropriate chinese treasuries and bank accounts held at the fed. all debts paid in a blink of an eye. no sovereign debt problem.

    we have very little sovereign debt denominated in someone elses currency.

    furthermore government debt issuance is not , i repeat not about funding government spending. it is about interest rate target maintanence. debt issuance allows the rba to control liquidity in short term money markets.

    someone should point these things out to our political lords and masters

  • 45
    Posted May 12, 2010 at 1:28 pm | Permalink


    the government financial deficit is equal to the private sector financial surplus, and visa versa,

    In an era of global capitla markets that is not true in the short term. The sum may not balance, due to net financial inflows from offshore. Both governments and private firms borrow internationally as well as doemstically. When that happens national debt grows. Even then, as long as the debt doesn’t grow faster than GDP, paying it back isn’t a problem. In the long term, if you keep running deficits till you wind up with a very large debt relative to GDP then it is a problem, as Greece now knows. But Australia is nowhere near that position.

    Borrowing for things that increase the GDP in the long term is also not a problem. The real danger is when (a la NSW or Victoria under John Cain) government borrowing is used for recurrent spending (i.e. you can’t balance the books) rather than investment.

  • 46
    Posted May 12, 2010 at 1:34 pm | Permalink

    hi james h,

    what we are talking about is the balance sheet effect,

    a $10 loan assett has an equal and opposite liability attached. the balance sheet effect is zero. nett interest margin will get reflected in the equity position of the entity that owns the assett, and is a reflection of profit and loss, not the balance sheet.

    the government is the only entity that can add nett financial assets into the economy, something to ponder for all those deficit hawks out there

  • 47
    Posted May 12, 2010 at 1:47 pm | Permalink

    hi socrates,

    a quick repll,

    the domestic and foreign private sector can be consolidated into one in balance sheet terms since assets equal liabilities and the transactions are distributional in nature.

    remember we are talking about the balance sheet effect, nothing else.

    as for government debt, see my reply to cuppa above.

    my lunch break is over will chat later.

  • 48
    Posted May 12, 2010 at 1:53 pm | Permalink

    furthermore socrates we are talking about the national income accounting identity here which says

    (g-t)= (s-i) – nx

    this is not up for debate, its accounting pure and simple.

    the left hand side of the equation reflects the government budgetary position , that is spending minus taxes, and the right hand side reflects the private sector position, that is savings minus investment minus nett exports.

    so if we were to simplify the relationship the government financial surplus is equal to the private sector deficit, or visa vers.


  • 49
    David Mason
    Posted May 12, 2010 at 1:54 pm | Permalink

    Captain Col: Schumpeter’s “creative destruction ” as the engine of capitalism certainly has its place – but not best applied to recessions which disproportionately destroy, or restrict capital to, start ups and innovative small enterprises. As well of course as setting skills formation back by tipping people out of work. An economy which otherwise looks like falling well below its potential output is better off incurring government debt to avoid these effects. Debt can be repaid – wasted lives can’t. Of course, as Ken Henry has noted it would be better if next time we were more prepared with pre-planned high quality public sector programs ready to go.

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