Sunday, 27 November 2011

The 2012-13 Budget Surplus

There's a bit more chatter about the need or otherwise for the Government to structurally alter fiscal policy in the MYEFO to ensure a Budget surplus in 2012-13.

I think it is very important to deliver that surplus as I have spelt out before – see

Of course the Government could let the Budget slip into deficit in 2012-13 but the economic consequences would be:

  • Interest rate settings higher than if the Budget was tight.
  • As a result, the Australian dollar would probably be higher (artificially in effect) than would otherwise be the case.
  • “Wasteful spending” would be left unchecked – this is undesirable in anyone’s language I would hope.
  • A slower path to lower public debt – which for Australia probably matters little given debt is so incredibly low, but one only has to look overseas to see the consequences of slack fiscal discipline. If the Government is to make a mistake on fiscal policy and the Budget, even Blind Freddie can see it would be better in Australia’s current circumstances to err on the side of fiscal tightness rather than being too loose. There's too much to lose.

And then there’s the very legitimate question of policy discipline. Let the Budget slip in 2012-13 – then why not the year after? Or the year after that? Or while a deficit of $3 billion is OK, what about $6 billion? What about $10 billion?


Barring an almighty global crap out, where of course all bets are off, the Government should stick to its guns, trim spending, tighten tax rules and juggle its priorities to ensure it has that surplus locked in for 2012-13. It's great economics and by the way, great politics.

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