Budget heat in a revenue drought

A chronic revenue drought seems to have set in across the world, leaving governments – including Australia's – facing the prospect of long-term budgetary restraints.

According to conventional wisdom, the reason government finances are in deep distress in many developed countries is they spent big on fiscal stimulus and bailing out their banks. Whether or not those policies were right, which is a separate issue, it turns out they were not the main reasons for the massive increases in government debt. Rather, the main reason was the loss of government revenue from weak economies and falling asset prices. This portends a long revenue drought necessitating policy responses – spending cuts or tax hikes – to align spending with revenue. This drama is being played out in the heavily indebted European countries, but the same principle applies to many other countries, including Australia.

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