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Rudd continues to struggle with economics

By Mikayla Novak - posted Thursday, 13 October 2011


Among the assortment of financial and economic indicators available, movements in share market indexes provide some of the more important insights into the vibrancy of national and global economies that one can find.

While economists might quibble the extent to which changes in share market values efficiently reflect financial and other relevant information, they do nonetheless provide invaluable insights about perceptions regarding changing economic circumstances.

If market conditions, or government policies which alter those conditions, are perceived to erode the profitability of publicly listed companies seeking equity capital on the share market then the value of shares will, other things being equal, tend to decline.

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To some degree, domestic policies can affect share market sentiment which in turn influences company share values.

When the federal government announced the details of its carbon tax in July the S&P/ASX 200 index fell by about two per cent on the previous day, with significant falls for manufacturing and mining stocks in particular.

There is also international empirical evidence to suggest that share markets returns are lower and volatility is higher when legislatures are in session, which is not altogether surprising given the role of taxation and regulatory policies on the economic climate for private sector activity.

But it is important to also recognise that international policies can also influence share market performance.

The continued reluctance of American and European authorities to repay their burgeoning public debts through credible fiscal consolidation programs, centred upon spending cuts, is being perceived by share market traders as being an important inhibiting factor for future economic growth.

And that, in turn, translates into weaker profitability for companies listed on share markets, many of whom have an international presence, than would otherwise be the case.

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It is therefore a bit rich for Kevin Rudd to blame participants in global share markets for responding the way in which they have been doing in recent times.

Indeed, the politicians and their fiscally profligate conduct, rather than the markets as Rudd claims, which need to be brought to heel.

This would entail nothing less than a return to the basic principles of sound public finance, including balanced budgets underpinned by low spending and healthy fiscal balance sheets, rather than kicking debt cans up a hill through endless bailout packages and other political compromises.

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About the Author

Mikayla Novak is a Research Fellow with the Institute of Public Affairs. She has previously worked for Commonwealth and State public sector agencies, including the Commonwealth Treasury and Productivity Commission. Mikayla was also previously advisor to the Queensland Chamber of Commerce and Industry. Her opinion pieces have been published in The Australian, Australian Financial Review, The Age, and The Courier-Mail, on issues ranging from state public finances to social services reform.

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Creative Commons LicenseThis work is licensed under a Creative Commons License.

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