Monday, January 21, 2008

Kev's 08 Inflation Plan

Kevin Rudd has announced his government's plan to control inflation. The 5 point plan aims to increase the targetted budget surplus from 1% of GDP to 1.5%. However, this is already likely to be achieved in 2007-08 because of increased tax revenue and cuts to Government spending since November's election. Given the overheating in the Australian economy,this is not enough. Reserve Bank Governor Glenn Stevens said, in an 18 January speech, that a
"... less favourable short‑term relationship between economic growth and inflation ... might be experienced for a time. This outcome, were it to occur, would make for a more challenging environment for macroeconomic policy‑makers. It would limit the extent to which monetary policies could respond..." (in 2008)
That is, it is more important for fiscal policy (the budget) to be used to control inflation by reducing spending and increasing the expected surplus. The Government needs to aim for a $20 Billion surplus.

Other aspects of the plan include ways to encourage real personal savings, tackling skills shortages, tackling national infrastructure bottlenecks and helping more people to reenter the workforce.

The budget is the biggest, and best, weapon Treasurer Wayne Swan has to fight inflation - it is tool the previous government was unwilling to use, as it splashed ever-more "middle-class welfare" and tax cuts (from which those with more benefitted more) into an overheating economy.