Deficit woe has the whiff of a red herring

Perhaps I haven't been paying proper attention, but I don't quite get this election campaign. Is it about austerity or handouts?

Perhaps I haven't been paying proper attention, but I don't quite get this election campaign. Is it about austerity or handouts?

Both sides are promising fiscal restraint culminating in a budget surplus sometime this century, yet their new spending commitments are as long as your arm. No, make that leg.

Talk about a conflicted message. The funny thing is, it's only in Australia that the budget deficit looms as a be-all and end-all economic issue, even though ours is relatively tiny.

At about 2 per cent of GDP and supposedly falling, it compares with a 3.2 per cent European average, 4.5 per cent in the US, 7.6 per cent in Britain, and more than 10 per cent in Japan. They have high levels of government debt, so you'd think it would be a white-hot issue. Not any more. For the first time since the GFC, the recent G20 meeting fretted about growth, not debt. It may have finally given up, of course, but even so.

More remarkable still is the International Monetary Fund's U-turn on austerity. It finally admitted this year that it had botched Greece's economy - with a lot of help from the Greeks - by overdoing the austerity. All the savage cuts and tax increases did was give Greece a bigger deficit than it started with. To be fair, the markets were also baying for blood and without the belt-tightening, Greece wouldn't have been able to borrow at all.

The point is, it's becoming more the accepted economic wisdom that cutting deficits when the economy is slowing is counterproductive, irrespective of the level of debt. Lately, the IMF has even been urging France to ease up a bit. Note: this is quite a different argument to saying Australia's budget has been well managed, when it hasn't. It's just that when there's no pressing external pressure to rein the deficit in - with our AAA rating, we're not even on a credit watch - and the economy is slowing, there's a case for some stimulus.

So what are the pollies going on about? Even the Canberra press gallery is having conniptions over the deficit.

It's certainly not an issue for economists. The Reserve Bank, not one to be relaxed and comfortable about anything, hasn't blinked an eyelid since the $30 billion budget deficit was confirmed.

In any case, about half the blow-out is the result of a slowing economy, and that's what deficits are supposed to do. The economy slows, so the budget takes less revenue as the number of jobs falls and more is spent on social security claims.

That's what economists call the automatic stabilisers. Weak economy? Deficit expands of its own accord, eventually rectifying the problem by boosting growth.

The problem is, it works in reverse too. The stronger the economy, the more tax revenue it pulls in, which eventually has a dampening effect.

That's why we should have had a surplus during the mining boom, and it's no credit to former treasurer Wayne Swan, or the government, that the deficit is this big even before it has some heavy lifting to do in the growth department.

At least the deficit will mostly look after itself when the economy picks up again, as it will, thanks to the boost from low interest rates and the weaker dollar.

So while you can't take any promised - or I should say implied - spending cuts any more seriously than all of the other promises, the point is, it won't really matter.

Twitter @moneypotts

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