Tuesday, May 12, 2009

Temporary Deficit Is A Good Thing… So Long As It Is temporary

Be alert, but not alarmed, when the Treasurer Wayne Swan delivers the bad news tonight. Not that there can be much bad news that we don’t already know. It’s a safe bet that the cavalcade of significant changes announced in a flood of budget leaks will come to pass more or less as reported. Increased payments for single age pensioners, reduced payments for the Medicare safety net, means testing for the private health insurance rebate, a reduction in the allowable salary sacrifice into superannuation as well as a reduction in the superannuation co-contribution, and the latest leak, a wind back of the taper rate to reduce the amount of part pension paid to so called “wealthy retirees”.

While the need for cost saving measures in recurrent spending is clear, and the extent of so called “middle class welfare” makes it an obvious place to start, it is still going to seem like a Jekyll and Hyde budget with substantial spending directed at infrastructure and nation building programs. There seems to be an inherent contradiction between the idea of having just recently handed out cheques for $900 to almost everybody with a postal address, and then turning around and turning off the tap for things like the private health insurance rebate. Already the opposition is making plenty of noise about that apparent paradox, but it ignores an important distinction.

The difference between the cash handouts and the spending cuts is that the cash bonus is a once only expense. The programs targeted for expenditure cuts are ongoing programs, and the savings gained will be ongoing savings against the budget bottom line. A good analogy might be to compare the situation to a family where one partner has lost a job and it is clear that income is about to drop. In that case it might be quite sensible to withdraw some savings to pay for some household maintenance and perhaps fix the family car now, so that the family is better equipped for the changing circumstances, while at the same time cutting the weekly grocery budget to accommodate the reduced income on an ongoing basis.

In the same way, plotting a course to steer the Federal Budget back into surplus has to begin with making cuts to recurrent or overhead spending, while at the same time providing funds to invest in infrastructure for future productive capacity. Of course, with the loss of revenue which has resulted from the economic slowdown, it becomes more difficult to actually find those funds and going into deficit is unavoidable. That is, unless we accept even greater cost cutting which would see the end to government services we all depend upon. Sure there would be no deficit, but millions of Australians would be left in the streets without work, without income, without shelter, without hope. Do the words “Great Depression” mean anything to you? That’s why a temporary deficit is a good thing… just so long as it is temporary.

If we want to see a return to prosperity, now is the time to invest in the future in terms of infrastructure, productive capacity, education, training, and health. Later, when the benefits of that investment are realized, the level of government revenue will rise significantly on the back of greater economic activity, just as it has fallen away now at this time of Global Recession. When that happens, the deficit will right itself and become a surplus once again. Hopefully, this time around, we will have learned to employ the fruits of prosperity more usefully than we have in the past.

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