Kevin Rudd as Prime Minister once spoke of a possible “temporary” deficit. Wayne Swan is wielding a heavy axe in a forlorn attempt to balance his 2012/2013 budget. 


He now realises what we all knew many moons ago… no pea and thimble trick will get him there.



Perhaps his is a $130 billion “temporary” deficit and that’s with no GFC. Like hell it is.



Deficit spending occurs when government spending exceeds government revenue, and that’s where the trouble starts.



The alternatives to deficit spending are an ongoing balanced budget or a surplus budget when government revenue is at least as much as its spending.



Deficits are nasty things because they mean borrowing. When a government borrows everyone loses, except the government. 



It creates a demand for money and demand, as with everything else, increases the cost. The cost is simply the rate of interest, so interest rates rise. 



This puts upward pressure on interest rates for everyone else due to competition for the same money (if it’s borrowed domestically). But that’s not all….



Deficit spending is also inflationary because there is dodgy money around to force up prices. Unfortunately there is only one way to dampen an inflation rate; lower demand. And how do you lower demand? Increase interest rates of course! So it becomes a rolling snowball as it did in the late 80s when rates hit 23%.



So why is Swan so keen to “invent” a surplus budget? Well, because Australia has nearly always enjoyed a triple A credit rating and that makes borrowed money cheaper. 



Without a triple A credit rating borrowing will be more expensive (a higher interest rate). And Swan knows Australia can’t afford a higher rate especially when he has got us into a hole to the extent of $130 billion. Hang on, I better numeralise it: 



That’s $130,000,000,000 (or roughly $6,000 plus interest for every man, woman and child in the country.)



Ok, there is actually an incentive, it is politically expedient, for Labor governments to run up massive debt in Swan/Gillard proportions. Seems silly eh? Not really.



You see, Labor gains in two ways. First, it benefits electorally by implementing grossly unaffordable social reforms. Second, it eventually becomes the Coalition’s problem. 



The Coalition has historically attempted to live within its means but when it takes Office its electoral stocks dive because it needs to rein in Labor’s debt. The Xmas presents of Labor need to be returned or restructured. As a result, Labor's stocks rise.



This is evident in Qld right now and partially evident in Victoria and will certainly apply Federally. 

For Labor it’s an irresponsible win win.



There is one way out of this endless bind. And that is to outlaw deficit spending but that would mean a Constitutional amendment, otherwise Labor in Office would simply re-legislate, as it has done now, for new borrowing limits.



We all know the chances of a referendum on Constitutional change, requiring an overall majority plus a majority (four) of the six States and both major parties need to agree. So that’s out, but do we really want deficit spending outlawed anyway? 



What if there was a war, an international monetary crisis, another GFC? Deficit spending can't be Constitutionally outlawed without more riders than a bloody rodeo.



Costello says we will be decades getting this Labor profligacy back under control. I think he is exaggerating… two terms will suffice. 



But wouldn’t it be nice if it WASN'T in Labor’s interest to leave the Coalition massive debt each time it took Office?

Leave a Reply

Please Login to comment
  Subscribe  
Notify of