It is tempting to think the Australian government’s decision to spend big – bigger than ever before, an unprecedented 33% of GDP this financial year according to the budget update – marks an embrace of Keynesian economics after decades in which Australian authorities have looked the other way.
Keynesian economics – named after its founder, 20th century economist John Maynard Keynes – holds that when private spending is too weak to keep people in jobs the government should ramp up its own spending to fill the gap.
Conversely, when private spending is too strong, and pushing up inflation, the government should rein in its own spending to rein in inflation.