Saturday 11 February 2012

George Megalogenis on budget surpluses

Back in November George Megalogenis looked the dumbing down of our economic knowledge in The curse of public economic illiteracy. He particularly focused on the damage done by Peter Costello in overly focussing on budget deficits and surpluses:
In a perfect fiscal world, where the politics and economics are aligned, voters would understand the need for temporary deficits. But this is Australia, where both sides of politics have spent the many years since Keating was booted out of office wilfully reducing the community's basic understanding of economics.

Costello is more responsible than most for dumbing down the debate. He had done so well with the "Beazley black hole" slogan in the late 1990s that he refused to countenance the possibility of cyclical deficit at the 2001 election. The nation's economic literacy has fallen ever since.
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That Costello budget slipped into the red anyway because he wasn't going to cut into a downturn. But the deficit wasn't confirmed until many months after the government had been returned for a third term. This is where he, and on his behalf the nation, lost perspective. Instead of saying, "Yes, that is what the budget is supposed to do in a downturn", he made excuses.
He goes on to write:
Like the children overboard affair, it was an unnecessary fudge with unforeseen consequences still being felt today. The public, in its wisdom, insists that Labor return the budget to surplus for 2012-13 even though the global economy is in danger of a double-dip recession. Why a surplus for the next financial year is non-negotiable has never been explained by either side.

It is easier to blame the politicians than the people when a nation trafficks in comic-book absolutes such as "stop the boats", "no, send them to Malaysia".

But the electorate must share culpability for the notion that a budget must always be in surplus. Seriously, what rational citizen demands handouts in good times and a surplus in bad?
He goes on to note that:
One final piece of information worth mentioning. Before the world froze in the second half of 2008, the budget projections for the financial year we are in now - 2011-12 - assumed revenue at 25.5 per cent of gross domestic product and spending at 23.9 per cent for a surplus of 1.3 per cent of GDP after removing the earnings from the future fund.

The post-GFC reality, as revealed in this year's budget, is that revenue is lower by 2.3 per cent of GDP while spending is 0.6 per cent higher for a deficit of 1.5 per cent of GDP in 2011-12.

To blame government waste for the deficit, as Abbott does, and to accept the sledge as Swan does by offering to keep cutting, is to miss the point of the real structural weakness in the budget. It's the tax base. But, like spending, it can't be repaired too quickly because the pursuit of more revenue from a slowing economy would increase the danger of a self-defeating recession.

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