Macroeconomic effects of a war with Iraq
Earlier this year (2003) with the looming and seemingly inevitable conflict in Iraq drawing increasingly near, doubt from various areas and parties arose over the justification of a war in Iraq. If Iraq invaded Australia or the U.S. then an inarguable case is presented for action and as a consequence; increased military spending is necessary, expected and enjoys an unquestioned existence. In contrast, the reality of the recent situation involved great uncertainty over the justification of a war. Consequently, the issue of economic cost was included in much of the political debate which filled the turbulent atmosphere that preceded the start of the conflict in the Middle East. Garnaut (2003) provides such example of this in his Sydney Morning Herald article 'Conflict tipped to rip billions from local economy'.
Economists argue over the relative importance of the economic factors involved that will contribute to the overall economic cost of a war in Iraq but it is generally accepted that the major costs will come from: increasing debt stemming from increased government spending (mainly military at first), higher oil prices and general uncertainty leading to lessened economic activity.
McKibbin & Stoeckel (cited in Garnaut 2003) places greater emphasis on "the increase in fiscal deficits due to extra government spending" than other factors, whilst Garnaut (2003) himself seems to believe an inevitable rise in the price of oil will have a significant effect although restrains himself from saying this directly.
First let's look at the issue of increased government spending. In the event of a war in Iraq involving Australia there would be significant rises in government spending/purchases, initially the majority of this would be military related and with time a greater proportion of the increased spending may come in the form of aid and...