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.)