It looks like years of simplified debate in Australia on macroeconomic policy are about to come back and, in the colloquial, bite us in the bum. The ‘surplus good, deficit bad’ mantra that has been embraced by both sides of politics in Australia has probably been a useful device to control government spending over many years of solid economic growth. It has meant that government spending has been well controlled in the good times and has left Australia with relatively little public debt.

But rhetoric for the good times does not apply to the bad times – or at least the mixed times. As the eastern state capitals sink into economic gloom the Federal government is about to release the Mother Of All Budgets – an attempt to get the Federal budget back into surplus (or at least appear that way) regardless of the economic consequences.

It makes no sense to be having tightening fiscal policy at the same time as we are easing monetary policy. And it makes no sense to try to use monetary policy (a country-wide economic instrument) to deal with a two- or three-speed economy that needs targeted assistance to some areas and not other areas of Australia. Whether you think that Australia is in a period of temporary dislocation as we move to a long-term mining future or you think the mining boom is temporary and the economic shocks need smoothing, it doesn’t matter. Both views would back government policy to ease the short-term pain. A surplus-at-all-costs budget will not do that.

(Footnote – some numbers on public debt to GDP are here. The ‘ordering and relative magnitude’ seem about right compared to other data on the internet but the actual numbers vary greatly depending on what is included and excluded. But any list has Australia close to the bottom of the OECD.)

4 Responses to The ‘bite us in the bum’ budget

  1. derrida derider says:

    According to the <a href=”http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/index.aspx”>IMF’s Economic Outlook Database</a>, in 2011 Australia had the 3rd lowest NET government debt and the 4th lowest GROSS goverment debt of the 34 advanced countries (ie the OECD).

  2. DP says:

    I undertsand that net public debt is low, but I thought the elephant in the room is the huge debt owed by the private sector such that if events went absolutely pear-shaped, (e.g. foreign creditors get tired of paying for our lack of net savings) the Fed Govt would have to guarantee that debt.

  3. derrida derider says:

    The level of net foreign private sector debt may or may not be a concern. I’m agnostic on that – I can see reasons why you might worry but also reasons why the current level might be perfectly appropriate, or even too low, given the investment opportunities.

    But what possible circumstances in the near future would lead an Oz government to do large-scale guarantee of that private foreign debt?  Our banks aren’t Icelandic or Irish ones, and even if they were no government would be so stupid to guarantee all their debts to foreigners after comparing the experience of those two countries.  And the politics of taxing Australians heavily so as to honor mutual for-profit deals made by private parties is not pretty, nor should it be.

  4. [...] 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 [...]

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