Defining the deficit

The debate is over - Australia is heading for a Budget deficit and the only question is how big it might be. Fortunately, the Government can afford to run deficits for some years.

The past three recessions have seen a peak to trough deterioration in the Budget position of between 3.5 per cent and 5.5 per cent of GDP. If this normal cyclical pattern is observed in the current downturn, the Budget could be expected to deteriorate from a peak surplus of around 1.7 per cent of GDP in 2007-08 to a deficit of around 2.5 per cent to 3 per cent of GDP within a few years. This implies that the Government will be running deficits of around $30 billion or more beyond 2009-10.

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