Forecasters divided on health benefits of a balanced budget

ON DECEMBER 20, the federal government ditched its commitment to return the budget to surplus this financial year.

The announcement by the Treasurer, Wayne Swan, came just six days after the economic survey ended.

At the time, only three out of 23 forecasters thought the government could deliver a surplus, and most thought it should not bother.

There was also disagreement about whether it was wise for the Treasurer to stick to his promise to deliver a budget surplus as long as he did.

Bill Mitchell, of Charles Darwin University, was one of two economists to forecast the largest deficit in the survey - $20 billion (projections ranged up to a $1.5 billion surplus).

He was concerned about the large pool of under-used labour that had grown alongside the mining investment boom, and that the private domestic sector was still trying to reduce the burden of the debt build-up that accompanied the credit binge before the global financial crisis.

Therefore, he said, the government sector ought to be running a deficit of about 3 per cent to 4 per cent of gross domestic product "for the immediate future, and then probably about 2 per cent of GDP continuously".

"There is no sense that the Australian economy is near full employment. The east coast economy, where most of us live, is close to recession," Professor Mitchell said.

Nigel Stapledon, of the University of NSW school of economics, said the government's projected surplus was the product of too many "accounting fiddles" to be taken seriously. He forecast a $5 billion deficit.

"There have been some genuine cuts and nationally fiscal policy is clearly contractionary as the economy heads into a 'possible' cyclical downswing," Professor Stapledon said. "But sharper genuine cuts would be needed from here on in and the government would surely not wish to risk to be taking credit for 'a recession we had to have'."

Only three economists believed the government could return the budget to surplus by June.

The Commonwealth Bank's senior economist, Michael Workman, was one of those. He projected a surplus of $1.5 billion - the largest forecast.

But he said it "seems odd" many business groups with a history of backing less government spending and lower taxes had been asking the government to slip into deficit.

"Is the corporate sector supporting smaller or lower government?" he asked. "We have a federal government, and an opposition, that want to run budget surpluses and are being criticised for it."