Sunday, 1 April 2012

One-eyed Economists: 99 is not the same as 100

The overwhelming consensus of market economists seem to be saying the Government should relax about the budget surplus objective in 2012-13 and be happy with a deficit.  At one level, this is fair enough, but when you look for some basic analysis of why this should be the case, there is a lack of detail on the consequences for this prescription.

No economist that I have seen is saying what the target for the budget deficit should be for 2012-13.  As I wrote yesterday, would a budget deficit of 0.2% of GDP be acceptable?  Why not 0.5%?  Or let’s go for 1% of GDP because the economy is really soft?  Hey, why not 2%? 

See the problem?  They bag the policy objective of moving to surplus without offering an alternative.  Not the policy advice that any Treasurer or Prime Minister would tolerate for a minute.

And then there’s the classic own-goal.  There is the almost unanimous comment that, from a macroeconomic perspective, a deficit of a couple of billions of dollars is all but the same as a surplus of a couple of billion dollars.

That is absolutely and utterly correct in our almost $1.6 trillion economy.

So why then, pitch for the deficit?  If the macroeconomic impact is the same, why go for the soft option of a deficit and not go in a bit harder and get that surplus?  After all, the macroeconomic impact is all but the same.

It’s like saying to a batsmen, who bats beautifully and finesses a gorgeous innings against the best bowling attack in the world that you will declare the innings with him on 99 not out.  After all, he’s done well, the team is in a winning position and hey, 99 not out is basically the same as 100. 

No it isn’t… and nor is a deficit of a few billion the same as a surplus of a few billion.

1 comment:

  1. The deficit (or tiny surplus) should be equal to the proposed surplus minus five billion, to fund the recommendations of the Gonski review.