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Treasurer Swan’s apocalyptic move

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Treasurer Wayne Swan’s steely commitment to a budget surplus last week made me think about the movie Apocalypse Now. It got me thinking about a reworked line from the film — “I love the sound of fiscal discipline in the morning”.

However, that’s the theorist economist in me. Theory suggests that balanced budgets and budget surpluses are great badges of honour for a government as it avoids crowding out the private sector when an economy is growing nicely. However, theory does support budget deficits and that’s why I thought the current world’s greatest Treasurer got it right when he spent up big in the face of the GFC and the possibility of a global depression.

Of course, I did question the spending selections — batts in rooves and school halls — but the throwing of money at the problem was a rare case of good politics and good economics at the same time.

I have to say I’m surprised that Treasury isn’t arguing with Wayne Swan that fighting for a budget surplus now might be a case of a good idea at the wrong time.

Before Malcolm Fraser was turfed out of the Lodge in 1983, his Treasurer, John Howard, shot for a surplus but a recession came along and the government ended up with a whopping deficit.

Treasury seems to think that our economy will grow fast enough to cop Mr Swan’s surplus fetish. And he insists it’s driven by economics not politics.

Last week the Reserve Bank told us that last year the average household’s net worth fell 6.5 per cent and at $600,000 it’s 11.5 per cent below the 2007 peak. So saving consumers are actually feeling poorer and that will not help consumption spending in the year ahead.

Meanwhile Treasury told us that this year’s budget is blowing out to $40 billion plus with the fall in tax revenue the worst since the 1950s.

By the way Treasury has been getting their economic growth forecasts wrong for some years and this explains why the past budget predictions have been way off the mark.

We had been led to believe that we were going to grow at three to four per cent but the last reading for December was a weak 2.3 per cent and it would be a brave forecaster who would say that the economy is stronger now.

The one hope for Mr Swan could be the RBA with money markets now betting there’s a bigger chance of a cut next Tuesday than was thought even last week. And so the Treasurer’s tough talking could encourage the RBA to try a cut ahead of May, when most economists think the Bank will move.

Lots of prominent business people and economists think both Treasury and the RBA are underestimating how weak the economy is and they also think a budget surplus is unnecessary at this time in the economic cycle.

It might not be political but this economic gamble of Wayne Swan could have serious political consequences next year. The fallout could be apocalyptic and of Queensland proportions.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Published on: Monday, April 02, 2012

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