Spending cuts are not an economic panacea. Neither are asset sales.

WHY is the Gillard government so fixated on a budget surplus? There is still slack in the economy. Underlying inflation is low. Commonwealth debt peaked at 10 per cent of gross domestic product in 2011-12 and is expected to fall to 9.4 per cent in 2012-13.

According to the International Monetary Fund, Commonwealth debt is about one-tenth of the debt of the Group of Seven advanced industrial countries. And yet the IMF has now abandoned its support for austerity budgetary policies. In the face of the prospect of a ''double dip'' depression in 2013 on top of the 2008 global financial crisis, the IMF recognises that policies putting debt reduction first are ''pro-cyclical'' - that is, they will amplify the likely global recession rather than offset it.

Australia is one of only seven countries with a AAA credit rating. It is probably better placed than any other country to run an expansionary budget to keep Australia on a full employment growth path and help ensure Australia doesn't contribute to a global downturn next year.

Official global forecasts indicate growth is likely to slow next year. In the midyear economic and fiscal outlook (MYEFO) published last week, the Treasury said bluntly that in terms of the international economy, ''all the risks are firmly on the downside''. It doesn't appear that the government has got the message.

The MYEFO measures to curb government spending and concessions (apart from monthly corporate tax payments) can be justified on equity and efficiency grounds.

But from a macro-economic perspective (the impact on spending in the rest of the economy) the main justification for the cuts is that they would ''make room'' for higher priority spending, including the Gonski education reforms, the National Disability Insurance Scheme and a means-tested dental scheme to replace the existing dental rort set up by the Howard government.

Obsessive debate about the budget deficit misses the point. In the current economic climate the risks in achieving a 3 per cent growth rate and keeping unemployment from rising above 5.5 per cent are both on the downside.

In terms of maintaining a full employment growth path, it is the change in government spending which is important. To get to a near-to-balanced budget in 2012-13 (a $1.5 billion surplus, equal to 0.1 per cent of GDP), the government has to cut $45.5 billion out of the income-expenditure stream compared to 2011-13.

Even if all this spending was pure waste, it still represents a lot of income for many people who in turn spend this money on other people's services and products.

Unless this cut in the income-expenditure flow from government spending - equal to 3 per cent of GDP - is matched by spontaneous growth in private spending, all the government will have achieved will be to ''make room'' for further growth in unemployment.

The situation cries out for public borrowing to fund nation-building infrastructure to fill the gap. But instead of selling bonds at 3 per cent, Infrastructure Australia recommended in a recent report some $200 billion of commercially viable, publicly owned assets (mainly port, electricity and water) be sold off to the private sector so the government can finance new infrastructure.

In financial terms, the proposal is the equivalent to the taxpayer borrowing at somewhere between 7 to 10 per cent. No wonder investment bankers especially demand governments balance budgets.

In Victoria, electricity assets are already privatised, and Water Minister Peter Walsh has announced water assets are not for sale. This leaves the Port of Melbourne. It is a vital state strategic asset. That is why port privatisation is not seen as an option for cities such as Rotterdam and Singapore whose governments are not in thrall to financial interests.

The Baillieu government recently appointed the former Kennett minister and now infrastructure industry privatisation lobbyist and Infrastructure Australia board member, Mark Birrell, as Port of Melbourne chairman.

Last week I was contacted by a market research organisation identifying itself as ASS that said it was conducing a survey on the Victorian economy. It was soon apparent the survey was designed to elicit broad attitudes to the Port of Melbourne, - whether the port was on the radar of voter concerns or not.

There is a fundamental conflict of interest between Birrell's different hats. As minister for major projects he was involved in financial planning of CityLink. The construction and design cost of the project was $1.2 billion. If the project had been financed by public borrowings (equal to about 7.5 per cent at the time), CityLink would have already been paid off. The toll can rise by up to 4.5 per cent a year plus CPI. Toll revenues (after expenses) of more than $400 million in 2011-12 would have accrued to the government. This would be available for investment elsewhere in Victoria, but instead goes to Transurban and has been available to cross-subsidise their poor investments elsewhere.

The return on the CityLink construction cost is now equal to 33 per cent and rising. The deal is not a triumph. It is usury.

Kenneth Davidson is a senior Age columnist.

Email: kdavidson@dissent.com.au