The driving force behind Australia’s current macroeconomic policy is a fictional Charles Dicken’s character, Mr Micawber. His famous quote:
Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
seems to be at the heart of government policy. A surplus will bring happiness and a deficit will bring misery.
This has no foundation in economics (at least on a year-by-year basis). But the government appears driven to pursue a budget surplus regardless of advice from the OECD, its advisers and its own supporters. So the only conclusion is that it is political, not economic, happiness and misery that Mr Micawber is advising the Prime Minister about. If the government does not deliver a surplus it will be hammered mercilessly by the opposition. Indeed, the AFR believes that this fear (together with the unfortunate fact that a budget surplus is unlikely) will drive the timing of the next election:
While financial markets have long speculated the government will go to an election before the budget rather than admit it cannot meet its surplus goal, …
Unfortunately, this has led to economic policy driven by politics rather than – well – economics. I have commented on this before. But perhaps this approach is understandable. As the Prime Minister noted on ABC radio today:
SABRA LANE: You speak to economists?
JULIA GILLARD: I deal with them carefully.