A good rule-of-thumb on deficits

Earlier in the year, there were signs that the general public had picked up the then orthodoxy that what we needed was a contractionary fiscal policy, to the point of not wanting their tax cuts in cash (there was support for diverting them to superannuation).

But it seems that the flipside orthodoxy – that we need deficits in the downside of the economic cycle – has not (or not yet) entrenched itself. A Newspoll published today found that 56% of voters would be concerned about the budget going into deficit next year.

As Club Troppo readers would have predicted, Fred Argy isn’t impressed.

Regardless of the purely economic arguments on this subject (few economists think that temporary deficits are of major concern), I think this is quite a good result. On the assumption that few voters will ever acquire sophisticated economic knowledge or understanding, and that they will use rules-of-thumb instead, an anti-deficit rule of thumb is the one to have.

In other countries with weaker anti-deficit cultures, borrowing is used to finance normal recurrent expenditures and avoid budgetary discipline. Australia is in a much better long-term position than most other countries for having taken its anti-deficit attitudes beyond what economic theory would recommend.

11 thoughts on “A good rule-of-thumb on deficits

  1. I agree with you about the long term health of running surpluses through the cycle. But can’t we bloody walk and chew gum at the same time? We could be in an awful mess if we try to run surpluses through a big recession.


  2. Nick – And if we do go into recession, there is no doubt that there will be a deficit, since the only ways of avoiding it, raising taxes or cutting programs, would be even less popular.


  3. “But can’t we bloody walk and chew gum at the same time”

    I think it’s really up to the government to convince people of this (which shouldn’t be hard, despite the mess they are making of it now). It’s also no surprise that people don’t like deficits — having to run a surplus at least means the government has to think about which group of voters to try to buy off. In this respect, I imagine just dropping a billion or two of pork pie on marginal voters as they did in their first attempt was not exactly convincing for many people. Nor was dropping a few billion more on the car industry.


  4. Bearing in mind that we are yet to actually go into recession and already the budget might be in deficit. This does not bode well for economic policy discipline. Aa Andrew says an anti-deficit bias is an excellent rule of thumb.


  5. Andrew, I think a more basic explanation for this result is that people understand the connection between a deficit and a weak economy and it is the prospect of economic weakness that concerns them.


  6. The major problem Rudd faced was a structural deficit of $8 which meant a budget deficit even on low growth let alone a recession.
    Since he didn’t get rid of most of it then it is clear we will have a budget deficit next financial year even with tepid growth.

    If things are as bad post Lehman bros as central bankers believe then a budget deficit is a necessary ingredient to counter that.
    However as yet we have not seen any proposed structural spending by the government.

    It would help if Government ministers did not speak as deficits bad and surpluses good and talk some sense.

    you expect the Opposition to talk nonsense as they have little to talk about but is it possible for the Government to act as the Government and not the Opposition.


  7. Andrew, do you include countries like USA and Japan as having “weaker anti-deficit cultures”?

    What such countries are doing is, in effect, to target a budget surplus over the entire economic cycle and live with deficits in the short term? Isn’t that enough?


  8. Fred – I don’t know much about Japanese political culture, but in the US even the right came up with rationalisations for deficits – cutting taxes to create or exacerbate deficits, in the hope that this would prompt spending cuts. I don’t think I have ever heard this argument made in the Australian context, much less seen it implemented.


  9. “few economists think that temporary deficits are of major concern”
    Some economists arguing for deficit spending add the condition that any debt incurred should be used to fund ‘quality’ infrastructure projects, not recurrent expenditure. Given the secrecy surrounding the process of assessing bids being put to Infrastructure Australia and the dodgy nature of many of these bids, it is highly unlikely that this condition will be met.

    Given that there is no way of knowing or quantifying the relative ‘public good’ of different project, it is naïve to believe that governments can pick ‘quality’ projects. Politicians will choose projects that meet their political gaols.

    This adds weight to supporting an anti-deficit rule of thumb.

    Alternatively, letting governments get into trouble with uncontrollable debt may led to further privatisation in a decade or so to get them out of a budgetary hole. This would be a good outcome. 🙂


  10. Andrew great that we are not heavily in debt especially at these times but downside is a lot of our economic infrastructure is run down and struggling to cope with the higher population due in part to an aversion to debt.


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