Forget simplistic spurning, it's a deficit we should embrace
You will have read about it, a big figure featuring in all the obvious headlines, but it's highly unlikely you will have seen that the really good and important news from Tuesday night is that we're forecast to have a federal deficit of $18 billion in the new financial year and one of about $19.4 billion this year.
That the government is not trying to peg back the deficit in 2013-14 should be welcomed by everyone whose first priority isn't doing whatever it takes to change the government.
Having been subjected to abysmally simplistic "deficit bad, surplus good" chanting from both sides of politics over the past couple of years, it's perhaps understandable that most commentary has gone along for the ride, suggesting that deficits this year and next year primarily represent budget failure instead of considerable relief.
Attempting to pull back from a $43.4 billion deficit in 2011-12 to nominal surplus this year was absurd. As it pans out, the $24 billion contraction achieved by trimming the deficit to $19.4 billion is without equal - a $24 billion turnaround, 1.6 per cent of GDP.
Between the lines of the budget is an admission that we can afford a deficit more than a surplus in 2013-14 and thus there is no real attempt to rein in the deficit in the immediate delicate period - that's planned for later years when some other treasurer has the job.
Net public demand - governments' collective impact on the economy - is taking half a per cent off GDP growth this year. Allowing a similar federal deficit to roll on in the new financial year means net public demand is forecast as having zero impact on GDP. Because economics is all about measuring the change in the moving goal posts, that's an improvement of 0.5 per cent of GDP from this year, but Treasury still forecasts weaker economic growth of 2.75 per cent while the Reserve Bank is a bit more pessimistic at around
2.5 per cent.
It would not have been hard for Swan to have produced a lower forecast deficit next year, but it would have been the wrong thing to do. Joe Hockey would have had the problem of dealing with the fallout from such further fiscal contraction, but it still would have been wrong and irresponsible.
Swan now is and Joe Hockey next year will pay the price for dumbing down the role of fiscal policy. Assisted by ideological zealots on the far right and shock jocks, they've managed to convince the public that government debt is a bad thing that must be paid off in total at the first opportunity. The real world is more complex than that.
Frequently Asked Questions about this Article…
The article says the federal deficit is forecast at about $19.4 billion for the current year and $18 billion in the new financial year. It also notes the 2011–12 deficit was $43.4 billion, so trimming that to $19.4 billion represents a $24 billion turnaround (about 1.6% of GDP).
The article argues that allowing a deficit in 2013–14 is sensible because the economy was in a delicate period and attempting a rapid swing to surplus would have been damaging. In short, a measured deficit can provide relief and support growth rather than forcing harmful fiscal contraction.
Net public demand refers to the collective impact of government spending and revenue on the economy. The article notes net public demand is taking about 0.5% off GDP growth this year; keeping a similar federal deficit next year is forecast to make net public demand have zero net impact on GDP — an improvement of roughly 0.5% of GDP from this year.
According to the article, Treasury forecasts economic growth of about 2.75%, while the Reserve Bank is a bit more pessimistic at around 2.5%.
The piece describes attempts to pull back from the $43.4 billion deficit in 2011–12 to a nominal surplus within a short period as unrealistic and potentially harmful. The author praises the $24 billion contraction to $19.4 billion as a substantial and appropriate adjustment, rather than an immediate push to surplus.
The article criticises simplistic politics of “deficit bad, surplus good,” saying public debate has been shaped by ideological voices that treat all government debt as automatically bad. It points out that politicians (Wayne Swan now and Joe Hockey later) face political costs for how they handle fiscal policy, and that decisions on deficits are as much about timing and economic conditions as ideology.
While the article doesn’t give direct investment advice, it implies everyday investors should note that a measured fiscal deficit is intended to support GDP in the short term. That can affect interest rates, economic growth expectations and monetary policy — factors that influence markets and investment returns.
No. The article explains the government has effectively admitted it can afford a deficit rather than a surplus in 2013–14 and is not attempting to rein the deficit in the immediate delicate period. Any tighter fiscal consolidation is planned for later years, potentially under a different treasurer.
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