STONE the crows! The deficit has become a diet. People who know they need to lose weight but are light on for willpower always have a very good reason why they can’t cut the calories. Which is where we are with the deficit.

Not that long ago the Gillard Government guaranteed a return to surplus in 2012-2013. But now what was assured is an aspiration.

As the Treasurer told Virginia Trioli on Wednesday, even with the mess in Europe and the US “we do expect to come back to surplus”. Unless we don’t, hence “these events have made that much harder. … Our fiscal strategy is important and we’re going to do our very best to implement it.” [i] On Friday the Prime Minister also came over all cautious, toning down the return to surplus from assured to an “expectation”.[ii]

Fair enough, nothing is assured in economics and if times get real tough real fast Canberra simply may not have the tax income to cover all the programs it dare not cut. And all sorts of people who understand this are giving the government a get out of debtors prison free card.

As early as January, the ACTU seized upon the Queensland floods as a reason for Canberra to keep borrowing. [iii]

Since the possibility of a second slump increased others have joined the comrades. Bob Brown (what a surprise) says a balanced budget across the “economic cycle” is a good thing, but this can mean whatever suits the senator and he does not rate a return to surplus in the next financial year as essential. [iv]

And in what initially surprised the Crows (until they read all the story), BHP Billiton chair Jac Nasser says Canberra should not obsess about debt.[v]

So it seems does that estimable economist, former Reserve Bank board member and all round voice of reason, Warwick McKibbin:

A fiscal contraction or even sticking to a fiscal surplus target in 2013 when revenues fall would impart a larger negative shock into the economy. Better to allow fiscal stabilisers to adjust – that is, revenues to fall and expenditures to rise to buffer the shock with a clear policy of debt stabilisation across future years as increased deficits are brought back into surplus but not by an arbitrary date. [vi]

Good-oh. But not all deficit spending is the same – and its supporters have different objectives.

The argument for budget binging is set out starkly by Adelaide academic Rhonda Sharp who sees surpluses as a blow to gender equality:

If men and women held the same social and economic positions, then there wouldn’t be a debate around the budget. But we do occupy different positions, and if you introduce spending cuts there will be different impacts. Expenditure cuts generally target the public sector, and the public sector is a very important employer of women. It’s also an employer with particularly good working conditions for women, with good arrangements for parental leave and care leave. Cutting public sector jobs is likely to disproportionately affect women, and consequently, worsen their social and economic status. Another issue is the fact that a larger proportion of women’s income is made up of government benefits and tax rebates. Women are more likely to depend on Centrelink payments. So if you start to play with spending cuts and tax rebates you are likely to have an uneven impact on women.[vii]

Standard stuff for people who believe in public spending at any price.

Neil Hart makes the case for spending up:

Put simply, government spending is not constrained by the capacity to collect tax revenue and/or borrow from the private sector; budget deficits do not lead inevitably to the accumulation of government debt. Budget deficits become ‘irresponsible’ only when the implied policy stance is inappropriate to the prevailing economic circumstances.[viii]

But the case for recurrent spending quickly becomes more important than capacity to pay. Last week’s universal endorsement for a disability insurance scheme makes the point. It is all but impossible to argue against the program – but nobody much is bothered where the extra $6bn per annum to fund it will come from. The Opposition, which supports the scheme, makes the obvious point that it will require more tax, but increased outlays easily outstrip collections – and try cutting disabled spending once a program is in place. [ix]

The difference between temporary pump priming and permanent commitments is easily ignored when there is money to be borrowed. Australians have always endorsed a case for more cake – before the Depression governments were borrowing to pay the interest on public sector debt.[x]

Which is why the Gillard Government should distinguish between calls to take on debt to productively invest or smooth out the effects of a downturn and advocates of binge budgeting.

As Michael Stutchbury has long argued, our structural deficit is disguised by the abnormal, and ephemeral, revenue generated by the China boom.[xi]

According to Treasury economists, the structural budget balance deteriorated from 2004-05 and we will still be in strife at the end of the forward estimates, after the stimulus spending is unwound.[xii]

And to continue to use the GFC, or the risk of a second slump, as cover for increased recurrent spending does not disguise the need to keep outlays under a level where Canberra is borrowing ever-more money, or not repaying what its previous debts.

And Nasser and McKibbin know it. Sure Mr Nasser sees no reason for a surplus next year – but he wants the debt used to “promote growth and promote productivity’’, which did not make it onto Professor Sharp’s list.[xiii]

And Professor McKibbin worries about the purpose and size of public sector spending in the system:

Bad fiscal design always has an unexpected cost. Why is a flood tax being introduced just as the economy slows? The forecast that this would help dampen the boom is now likely to be wrong. There clearly should be an urgent review of the mismatch between spending commitments in the pipeline and highly uncertain revenue.[xiv]

Too right. Perhaps there is a case for cake in times of crisis but borrowing to fund permanent binging and claiming it is responsible is budgetary comfort food, specious as it is self indulgent.


[i] ABC News Breakfast, August 10 @  recovered on August 14

[ii] Siobhain Ryan, “PM softens line on surplus date,”, August 13

[iii] Ben Packham, “ACTU calls on Julia Gillard to delay return to surplus,” The Australian, January 19

[iv] Matthew Franklin, “Brown tells PM surplus can wait,” The Australian, August 11

[v] Jamie Freed, “Surplus not critical says BHP head,” Australian Financial Review, August 11

[vi] Warwick McKibbin, Ditch the delusion that stimulus saved us from GFC,” The Australian, August 10

[vii] Rhonda Sharp, “How the surplus drains the gender balance,” May 5, recovered on August 14

[viii] Neil Hart, “Discretionary fiscal policy and budget deficits: An ‘orthodox’ critique of current policy debate,” The Economic and Labour Relations Review,” 19, 2 (July) 2009, 39-58, 50

[ix] Phillip Coorey, “Long journey begins on disability insurance,” Sydney Morning Herald, August 11

[x] Anne Henderson, “Government debt and Australia – hark the 1920s call,” Sydney Institute Quarterly, 35 (June 2009) 3-4, 3

[xi] Michael Stutchbury, “Swan hides budget risk,” The Australian, May 17

[xii] Tony McDonald, Yong Hong Yan, Blake Forward and David Stephan, “Estimating the structural budget balance of the Australian Government,” Economic Roundup, February 2010, 76 @

[xiii] Freed, ibid

[xiv] McKibbin, ibid