Surplus fetish: the political economy of the surplus, deficit and debt

• David Richardson
• The Australia Institute

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09 May 2011

The federal budget presents a complex management puzzle that all governments have to address and explain to the electorate. Sometimes concepts are borrowed from the corporate sector and sometimes analogies are made with the household sector; the Howard Government, in particular, imported numerous corporate accounting concepts. But often these concepts are applied uncritically and inappropriately. By way of discussing the budget balance—surpluses, deficits and the debt outcome—this paper addresses some of those inappropriate usages and their consequences.

During the recent election campaign, both sides of the political debate paid homage to the virtues of a budget surplus, along with the associated views that deficits and debt are ‘bad’ and need to be reined in as soon as possible, and continue to do so. Budget one-upmanship has moved beyond the balanced-budget obsession of the 1990s to the new aim of producing an ongoing surplus, the bigger the better, under which it is taken for granted that everyone will be better off. Accordingly, the main focus of the economic debate is about bringing in a surplus as big and as soon as possible, preferably at least one per cent of GDP. However, as will be shown, the present commitment to a return to a surplus of at least one per cent of GDP can actually be seen as a commitment to tax the average taxpayer $1300 more than is necessary to fund government services.

The Rudd/Gillard Government was proud of its record during the global financial crisis when it allowed the budget to go into deficit, the automatic result of a downturn, and deliberately increased the deficit through its stimulus packages. The aim was to prevent the economy from falling into recession so as to limit the increase in unemployment. Eminent economist Joseph Stiglitz praised Australia’s stimulus package saying: ‘my impression was that it was the best— one of the best-designed of all the advanced industrial countries’. Stiglitz also pointed out that countries faced with recession have a choice: they can waste money on government spending or they can waste human beings in unemployment and business failures. Without the stimulus, and assuming the earlier unemployment forecasts had been borne out, Australia would have lost production of around $44 billion per annum.