Wayne Swan's pursuit of a budget surplus is misguided.
Explainer by The YourView Team
Next week Wayne Swan delivers the 2012-13 budget, and the signs are that this one will show a surplus. It may be a modest one, but a surplus all the same.
But is this really a good idea?
Dickens' character Mr Micawber famously said: "Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery."
For Wayne Swan, a budget deficit would be political misery indeed.
For one thing, he's publicly promised to deliver a surplus. To renege on this promise would add fuel to the firestorm of criticism of the Labour government for breaking promises.
For another, his previous four budgets have all been in deficit. Sure, he's had to GFC to contend with. But with yet another deficit, Labour might be going to the next election having never balanced the books, handing political opponents another heavy rhetorical cudgel.
So Wayne Swan has powerful political motivations be seen to be delivering a surplus. But doing so will require very heavy cuts to government spending.
Tim Colebatch claims that Wayne Swan's cuts are estimated to amount to around 2.5% of GDP -more than any previous government has cut from the economy. Possibly enough to tip the country into a recession.
Still, Wayne Swan says that a budet surplus is a vital economic objective. Is he right? Here are some of the main arguments being circulated:
It is misguided because...
It is NOT misguided because...
It will slow the economy.
At a time when the mainstream (non-mining) economy is struggling, due to both the continued effects of the GFC and to the distortions created by the mining boom, slashing government spending to will put the brakes on economic growth and possibly even induce a recession.
Critical social needs will be denied.
It is wrong to cut funding for critical social needs such as health and education when such funding can be maintained by deferring a return to surplus to better economic times.
It will lead to greater costs later.
The financial and social damage done by slashing government spending in difficult economic times will have to be redressed - at much greater cost - further down the road.
It will prepare Australia for a possible second GFC.
Australia came through the recent GFC relatively unscathed in part because its strong financial position allowed it to respond decisively via government spending and lowering of interest rates. Creating budget surpluses now will help create a similar buffer in case crisis returns.
It will give the RBA flexibility to cut interest rates.
The best way to help the non-mining economy would be for the Reserve Bank to cut interest rates. A budget surplus will give the RBA flexibility to do this.
It will reduce future debt burdens.
Budget deficits have to be repaid with interest at some point. Many Western countries are now burdened with crippling debt burdens. To avoid this fate, Australia must shift back to running budget surpluses at the earliest opportunity.
What do you think? How good are these arguments? Where does the balance lie?
[Image: publik16, Flickr]
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