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It's the weak recovery that worries, not surplus

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Gittins: The budget deficit controversy

Will Gillard abandon her promise of a budget surplus or will she announce yet more spending cuts to get it back on track? Ross Gittins explains.

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I hate to burden you with a topic as earnest as the budget deficit so close to the holidays - I had hoped to write about the idea of giving someone a goat for Christmas - but the saga of whether the Gillard government will manage to get its budget into surplus this financial year has reached farcical proportions.

A few weeks ago we learnt from the national accounts that the economy's rate of growth slowed to 0.5 per cent in the three months to September. When some parts of the media concluded the most significant implication of this news was that it increased the likelihood of the budget balance not returning to surplus (which it does) I realised the public debate was running off the rails.

Contrary to the impression we are being given, the budget balance is a means to an end, not an end in itself. We don't run the economy to balance the federal government's budget. And when we get our quarterly report on how the economy's travelling, the primary question is not what it tells us about the government's performance or it political prospects.

<em>Illustration: Kerrie Leishman</em>

Illustration: Kerrie Leishman

The budget was made to serve the economy, not the other way round. And the economy was made to serve us. So the primary question to be asked when we receive the quarterly report card is what it implies for us. Is our material standard of living improving more slowly than we'd prefer? Is inflation getting worse? Is the economy growing fast enough to stop unemployment rising?

These things matter because they matter to us and our lives. It's only because they matter to us that they also matter to the fortunes of the governments we re-elect or toss out. So the economic implications of the budget balance come first, the political implications are very much secondary.

Trouble is, for both the public and the media, the political implications of the budget balance are deceptively simple, whereas the economic implications are complicated and, to many, incomprehensible.

Politically, the only thing people think they need to know is that anything called a deficit must be bad and anything called a surplus must be good. Most political reporting about the budget balance is based on this assumption.

The opposition has been reinforcing this simplistic reasoning unceasingly from the moment in 2009 it became clear the global financial crisis had pushed the budget balance into deficit. Its success explains why, in the election campaign of 2010, a foolhardy Julia Gillard took a mere Treasury projection that the budget would be back in surplus by 2012-13 and elevated it to the status of a solemn promise.

Economically, however, it ain't that simple. From an economic perspective, budget deficits are bad in some circumstances, but good in others. Similarly, budget surpluses are good in some circumstances but bad in others.

How could this be so? It's because national government budgets operate at two quite different levels. At one level the government's budget is the same as that for a business or a household: it's a forecast of how much money will be coming in and going out during a year. You use budgets to ensure things go to plan and you don't get in deeper than you can handle.

At another level, however, the budgets of national governments are quite different from other budgets. Because they're so big relative to the size of the economy - equivalent to about a quarter - what's happening to the economy has a big effect on the budget. But the budget is so big it can also be used to affect what happens to the economy.

This is something few non-economists seem to understand. People who focus solely on the political implications of the budget, assume that if the budget moves from surplus to deficit this could only be because the government has chosen to spend more than it is raising in taxes. If the budget moves from deficit to surplus, this could only be because the government has chosen to spend less than it's raising in taxes.

Not so. The other reason budgets go from surplus to deficit is that when the economy turns down, this causes tax collections to slow or even fall and government spending (particularly on unemployment benefits) to grow rapidly. Similarly, the other reason budgets go from deficit to surplus is that the economy speeds up, causing tax collections to grow rapidly and spending on unemployment benefits to fall as more people find jobs.

This automatic deterioration in the budget balance is what happened after the financial crisis hit business and consumer confident so hard. In this case, the descent into deficit was good, not bad. Why? Because it represented the budget helping to break the economy's fall during the downturn.

What complicates matters was Kevin Rudd's decision to use a temporary burst of government spending to stimulate the economy out of its downturn. At this point we had the economy making the budget balance worse automatically, but also the government choosing to add to the worsening as a way of hastening the economy's eventual recovery.

But just as the budget balance deteriorates automatically when the economy turns down, so it improves automatically when the economy recovers and resumes its growth. Treasury's projection the budget would be back in surplus by 2012-13 was based mainly on its assumption of a strong recovery in tax collections.

This hasn't been happening, thus making the return to surplus unlikely. From an economic perspective, it's the weak recovery that's worth worrying about, not the delayed return to surplus. From an uncomprehending political perspective, however, that won't save Gillard from a caning.

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198 comments

  • It’s okay Ross – it wasn’t you that burdened us with this - it was Swannie. It’s fine to go into debt to stimulate the economy, but at some point you’ve got to start paying it back.

    Labor’s problems are twofold – firstly they have absolutely no plan to repay any of their rapidly growing debt. But more troubling is the DNA aspect – the last time Labor delivered a surplus was in the 80’s – about the same time as Springsteen had his last memorable hit. It’s ingrained in their DNA – borrow, spend, borrow, spend. There have been 12 successive deficits from Labor governments, and you can add another one on top for the current year.

    Imagine where we’d be economically under Labor without the mining boom and the clean balance sheet they inherited from the Coalition. Now that is a scary thought.

    Springsteen – Swannie’s hero – has a current album called Wrecking Ball. Coincidence ?

    Commenter
    Hacka
    Location
    Canberra
    Date and time
    December 19, 2012, 9:34AM
    • Even more scary, hacka, is where we would be under Abbott - whose DNA is so scary that he cannot even predict the effects of a single variable - the Carbon Tax - and would be totally incapable of managing a complex economy with mulitple variables.

      Commenter
      Ross
      Location
      AMLLABULA
      Date and time
      December 19, 2012, 9:58AM
    • Did you even read the article, or do you just type the same thing without thinking over and over again?

      Commenter
      Jace
      Location
      Sydney
      Date and time
      December 19, 2012, 9:59AM
    • Imagine where we would be if tax revenue hadnt dropped by $20bn and the government still owned Telstra

      Commenter
      asdf
      Date and time
      December 19, 2012, 10:01AM
    • Yeah but Ross & Pascoe have been asleep at the wheel telling all & sundry that everything was bonza when it clearly wasn't. Early next year will be a bloodbath and these economic guru's never saw it coming.

      Commenter
      Brisbane Bear
      Location
      Brisbane
      Date and time
      December 19, 2012, 10:08AM
    • Hacka,
      And when is that time to start paying it back? Not even the LNP have said they would be much faster in paying it back.
      You are living in a self-legitimising economic fantasy land.
      The articles basic premise is that we needn't come back to surplus as fast as budgeted and yet you decide that we should have.
      I tell you what, if it wasn't for the stupid baby bonuses and the first home owenrs grants we would have been in a better position than we are now, because basically Costello et al left us with a structural deficit (i.e a small surplus when the going was good but it crashed out as soon as the tax receipts dried up).

      Commenter
      Econorat
      Location
      Sydney
      Date and time
      December 19, 2012, 10:24AM
    • "they have absolutely no plan to repay any of their rapidly growing debt"

      More reank dishonesty from coalition cheerleader Hacka whjo I exposed yesterday as lying about everything from government policy to the debt. The surplus is set to grow year-on-year - a small surplus in 12/13 to a much larger one in 13/14. Commodity proces have jumped significantly in the last couple of months and mining investment proceeds apace.

      It doesn't matter what the government do, Hacka an co. will keep on lying about it.

      Commenter
      Think Big
      Location
      Sydney
      Date and time
      December 19, 2012, 10:29AM
    • Adsf....
      Just shows your knowledge of the political landscape which is nada... Labor government has sold a huge chuck of telstra too how come you didnt mention that... also the Liberal government didnt sell telstra to build school halls and install fat bats it was too pay the last labor governments debt.... With the lost of 20billion in revenue sure that is true.... but what about the last 4 years where the government was earning more than ever from energy and iron exports and it only took 1 year to go into debt with labor. These are the facts....
      Sure Ross has a point there is a time to worry about surpluses and a time not too.... Now is the time not too we need government money to stimulate the economy... the problem is 2 fold... We have reached our borrowing ceiling and the second problem for the government it will have to break another promise there has been 2 big promises broken already because the surplus will be the third and thats a strike out in baseball

      Commenter
      Mark
      Date and time
      December 19, 2012, 10:40AM
    • Humphrey B Bear,
      You've been calling a disaster for all this year, and still nothing. Now you say it's gonna be early next year.
      I'll call you on that one. what's that? Nothing to say for yourself HBB?

      Commenter
      Econorat
      Location
      Sydney
      Date and time
      December 19, 2012, 10:48AM
    • @Hacka.........Firstly, Abbott & Hockey do not have an alternative policy. So we bring in a surplus & the economy goes to crap or we start spending to get things moving. Either way the LNP will bang on that they would do it differently. So my question to you is......what would they do?.....what is their policy?

      Commenter
      Bazza
      Date and time
      December 19, 2012, 10:52AM

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