Sensible economists accept that, because they are determined by politicians, budgets are more about politics than economics. Pre-election budgets are more political than other budgets. And the budgets presented before an election that a government fears losing are entirely politically motivated.
Welcome to this week’s budget. But here’s the point: whatever the motivation behind the decisions announced in the budget to increase this or decrease that, all decisions nonetheless have an effect on the economy.
It is the overall effect of a budget on the economy that interests macro-economists, not so much the motivations of politicians. Good economic analysis therefore involves setting aside politics while focusing on determining the economic consequences.
A look at this week’s budget indicates that with all its vote-buying freebies, the budget will give a huge extra boost to an economy that was already growing strongly, with exceptionally low unemployment, but a rising inflation.
What the hell are these guys doing, powering up an economy that doesn’t need to power up just to try to buy their re-election? But looks are often deceiving and the story is more complicated than that.
You cannot judge the “position” of fiscal (fiscal) policy adopted in a particular budget – whether it will work to increase aggregate (total) demand (expenditure) in the economy or to contract demand – just by looking just a few of its many “measures” (policy changes) that grabbed the headlines, while ignoring the hundred other measures it contained.
And, as with many concepts in economics, there are different ways to measure them, with those different ways giving you somewhat different answers.
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