Nov 30

Australian Government Budget Surplus…a very poor decision

Normally I don’t like to comment on actions by the Australian Government but with the announcement of a cut in expenses in order to obtain a budget surplus I have to.

Its widely recognised that the level of Australian Government debt is very low by world standards. If you look at my last post on Australian Government Bond yields you can see that there is also little concern from markets about the size of government debt because yields are so low. Yields are also very low because the outlook for the Australian economy is not particularly strong.

The level of unemployment is a reasonable indicator of measuring the relative quality of life the average person has. Obviously, if we are out of work then our income’s are lower and our quality of life suffers somewhat. One of the primary objectives of the Reserve Bank is in fact the maintenance of  full employment, along with currency stability and economic prosperity and welfare of Australians. No doubt these objectives equally apply to the implementation of fiscal policy also.

The fact that yesterday’s decision will result in higher unemployment in order to control an already well controlled level of government debt is ridiculous.

The simple approach of any government over time should be to save during the good times (which occurred in the Howard years) so it is in a position to spend when times are tough (which occurred during the Rudd years). Taking this approach increases the chances of achieving smoother levels of employment, economic stability and therefore increased prosperity for us all.

By the government’s own admission, unemployment is expected to increase and if the government is reducing expenses then this will be a significant contributor to this increase…hardly improving our economic prosperity.

The Australian economy is operating at two speeds and if Europe gets worse then it will be one speed and that speed is slow. With our debt levels low, cutting expenses in the hope of a budget surplus given the fragility of our economy in the context of global macro uncertainty is unlikely to help. When times are tough, cutting expenses is likely to reduce revenue and this won’t help our debt position at all…it will make it worse.

The problem with the budget over the last 6 months has been lower revenue and increasing revenue (such as through a resources tax in these incredible resource boom times) is far more important and its clear the government does not have the courage to implement this.

It is obvous the budget surplus is simply addressing a political agenda which is independent to our prosperity as a nation and the fat cat miners win again at the expense of the rest of us.

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