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Focus on timing of budget surplus

By: Garry Shilson-Josling
09 May, 2011

When the budget is handed down on Tuesday, there will be great attention on the precise timing of the projected return to surplus, something which really doesn't matter all that much.

It would matter a great deal if Australia's budget position was weak, if the deficit was unmanageably high rather than heading toward one per cent of gross domestic product (GDP) in 2011-12 even in the absence of new belt-tightening measures.

It would matter a great deal if government net debt was massive, like Portugal at over 40 per cent over GDP, Spain at more than 60 per cent, the US at nearly 70 per cent or Greece at around 100 per cent of GDP.

Instead, debt will top out at not much more than six per cent of GDP, not even one percentage point above the average of the past 40 years.

This is not to say the government should take its eye off the ball.

Common sense says that when the markets for Australia's exports are booming, a government ought to be able to run a succession of surpluses, recharging the fiscal cannon for the next time the economy is attacked by a global economic meltdown of some sort.

The real test for the government will be another year or two into the boom.

As the surplus naturally grows bigger, the temptation to cap it at around 1.5 per cent of GDP and fritter away the rest - as was done in the years leading up to the global crisis - will grow.

But that test is yet to come for Wayne Swan, or whoever has his job two or three years from now.

And the argument that fiscal policy should not be boosting growth in total spending, now that the global financial crisis has largely passed and the minerals boom is gathering pace again, is a reasonable one.

But whether the budget makes it into surplus by 2012/13 or doesn't quite get there, meaning we have to wait until 2013/14, is no big deal from a macroeconomic perspective.

Similarly, whether real outlays fall from an estimated 25.1 per cent of GDP in 2010/11 to a little more, or a little less, than the 24.3 per cent forecast in Treasury's mid-year review in November is not the make-or-break matter for Australia's economic outlook.

The same goes for the government's pledge to limit real growth in outlays annually to less than two per cent in real terms.

It makes sense to "make room" for the mining boom, to reduce the risk of an upsurge in inflation.

But, given the export price boom added the equivalent of five per cent of GDP to Australia's real purchasing power through 2010, and looks set to boost it by a similar margin this year as well, there is only so much room-making that can be done with fiscal policy.

In any case, not all government spending is to be frowned on, even if the argument that the less fortunate warrant a helping hand is rejected.

There are plenty of measures that would to boost Australia's productive capacity.

Helping the unemployed break back into the labour market, clearing infrastructure bottlenecks, supporting adult retraining programs, encouraging labour mobility by reducing the enormous cost of selling a home and buying another - the potential list is a long one.

Some increased spending in these areas might make more "room" for the economy to expand than cuts in other areas would.

But such subtleties are usually lost on budget night, when most of the focus will be on the totem issues - the projected bottom-line underlying cash balance and indicators of the size and growth rate of government spending.

Like Kate Middleton's wedding dress or Princess Beatrice's hat, these details may not mean much in the grand scheme of things but, like the dress and the hat, they give us something to talk about.

Source: AAP

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