Forecasters divided on health benefits of a balanced budget
The announcement by 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 around 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.
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."
Frequently Asked Questions about this Article…
On December 20 the federal government abandoned its public commitment to return the budget to surplus this financial year. The announcement was made by Treasurer Wayne Swan shortly after an economic survey had ended.
Only 3 out of 23 forecasters believed the government could deliver a surplus by June. For investors this split in forecasts signals uncertainty about the fiscal outlook, which can translate into unclear economic growth prospects and policy direction in the near term.
Forecasts in the survey varied widely—from a $20 billion deficit (the largest deficit forecast by Bill Mitchell of Charles Darwin University) to a $1.5 billion surplus (the largest surplus forecast by Commonwealth Bank senior economist Michael Workman). Others, such as Nigel Stapledon of the University of NSW, forecast around a $5 billion deficit.
Bill Mitchell said a significant pool of under-used labour had emerged alongside the mining investment boom and the private domestic sector was still reducing debt after the pre‑GFC credit binge. He argued the government sector should run a deficit of about 3–4% of GDP in the immediate future, then around 2% of GDP continuously, because the Australian economy was not near full employment and parts of the country were close to recession.
Nigel Stapledon described the projected surplus as the product of too many 'accounting fiddles' and forecast a $5 billion deficit. He said recent genuine cuts meant fiscal policy was already contractionary and warned that sharper cuts could risk tipping the economy into a cyclical downswing or recession.
Michael Workman, senior economist at the Commonwealth Bank, was one of the three forecasters who predicted a surplus—about $1.5 billion. He said it 'seems odd' that many business groups that typically favour smaller government and lower taxes were asking the government to slip into deficit.
Wide disagreement among forecasters highlights uncertainty over fiscal policy and the economic outlook. For everyday investors, that can mean greater uncertainty about growth, employment and corporate earnings. It’s a signal to monitor economic indicators, fiscal announcements and consensus forecasts rather than relying on any single projection.
Based on the debate in the article, practical steps include staying informed about official budget announcements, watching labour market and growth indicators cited by economists, and being cautious about assuming fiscal tightening will be neutral for the economy. The article suggests the fiscal stance—whether contractionary or running deficits—matters for economic momentum, so keeping an eye on updates from reputable forecasters can help investors make more informed decisions.
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