November 24, 2008 | Graham

Surplus? What surplus? Happy anniversary Mr Rudd

The things you see when you don’t have time to blog. I’ve been sounding-off to colleagues for a couple of weeks now (references available on request) every time the government spends another piece of the “surplus” to stimulate the economy that there very probably is no surplus.
Now Access Economics has beaten me to the punch. In a report to be released later today, they claim that the budget surplus this year will most likely be only $4.8 billion. The way the government is spending the “surplus” this is an estimate which is likely to be on the high side and which should have been quite obvious to the Opposition, Treasury officials, journalists, commentators, market economists and investors.
So why has the government been able to get away with the fiction that there is a $20 billion surplus just sitting in the bank which can be drawn down when and as they want? I have no idea, but it raises questions about the competency of our whole political and economic classes.
Here’s how I do the maths. The Commonwealth Budget has a revenue of $320 billion. At $22 Billion, the surplus is roughly 1.5%. Now, let’s assume that revenue falls 5% short of its projection (which would still represent a rise over last year’s revenue) – that’s a decrease of $16 B in the surplus.
Now, let’s assume that expenditure also rises and restrict those rises only to social welfare expenditure which is the largest area of expenditure, and the one where the government has least discretion. Social welfare amounts to $102 Billion, and we’ll put that up by 5% too. There’s $5 Billion gone, and with it, most of the rest of the surplus.
All of which means that in all likelihood, the $10 Billion that the government has thrown at Australians as an early Christmas present wasn’t taken from the surplus at all, but will be borrowed from those same Australian people, or international financial markets.
Now Access Economics have a much more sophisticated model than me, but as I’ve noted before, sophisticated models don’t necessarily give you better answers, and the history of Access Economics pronouncements reflects this. But in this case, my back of the envelope calculations support their model, and I think they are very likely to be too conservative.
Happy first anniversary Mr Rudd.

Posted by Graham at 6:49 am | Comments (15) |
Filed under: Uncategorized


  1. Graham, I take your point, but it’s their job to try to boost spending and confidence, isn’t it? Surpluses aren’t worth having while the economy tanks, are they? That’s the NSW government’s approach, and they’re rightly being pilloried for it.

    Comment by Jason — November 24, 2008 @ 7:50 am

  2. I’ll try and do a follow-up post, but to a certain extent the extra spending is built into the budget via social welfare outlays. They should act to boost things over where they would have been by allowing people to maintain some level of spending.
    My point is that we’re probably in deficit and the automatic stabilisers built into social welfare will be starting to do their job. If the government wants to spend more money, then it needs to justify it in terms of increasing the deficit, not just dipping into the surplus.

    Comment by Graham Young — November 24, 2008 @ 9:30 am

  3. Well, okay. There’s a couple of issues, then. First, I wonder whether waiting for those mechanisms to kick in is better than being proactive in spending initiatives. You might actually save a few jobs, preserve some confidence and maintain the tax-base into the medium term.
    But I’ll agree with this much – very, very soon, they need to be straight with people, tell them we’re going into deficit, and furthermore that this is not a bad thing – surpluses are there to be spent in bad times, not pointlessly squirreled away. It’s like a macro version of the balls-up on tax equalisation on alcopops – they’re doing perfectly legitimate things, but they’re not being honest about why they’re doing them.

    Comment by Jason — November 24, 2008 @ 10:38 am

  4. And I wonder why it would be any suprise that a Government is not being totally open and honest with its citizens. For goodness sake we just had 12 years of Howard. He didn’t even have to worry about confidence in the economy and he still couldn’t stop lying (did you see him slither round the Hanson issue). Face it, it’s force of habit.

    Comment by Patrick B — November 24, 2008 @ 11:01 am

  5. I don’t have a problem with extreme measures in these circumstances, but I don’t think the $10 B is going to be very effective.
    There are two things happening at the moment. One is the deleveraging, which was going to lead to a slow-down in turnover, and therefore slow the economy. The other is the crisis of confidence in the banking sector where credit is becoming unavailable, even for worthwhile purposes.
    To a certain extent we need the economy to slow down so that the deleveraging can occur and savings can replace consumption until we have the balance back.
    The problem is, if it slows too precipitately then you go into a steep downward spiral. And that is going to happen if credit is unavailable at any price.
    So fixing the banking system is priority number one, followed by ensuring that there is enough cashflow in the system that it doesn’t disappear down the plug-hole.
    We’ve probably done as much as we can on the banking front, and will just have to wait until overseas banks recover. This will happen when they end up taking deposits, but having nowhere to lend them. They’ll have to start lending and take the risk, or they will go broke.
    The problem with the $10B is that most of it will probably get saved. People will see it as a one-off, and a product of really bad-times, so won’t want to put it into consumption. In which case it will go into the banks, which won’t do us much good until they start lending again.

    Comment by Graham Young — November 24, 2008 @ 11:09 am

  6. Oh get over Howard Patrick. You can’t keep using him as a scapegoat for everything. I thought you didn’t like him because he did lie. Has that changed now? He’s the model the Rudd government ought to follow?

    Comment by Graham Young — November 24, 2008 @ 11:12 am

  7. Can anybody enlighten me?
    What is the real difference between National debt and a budget surplus/deficit.
    Whilst the world applauded John Howard and Peter Costello for running a surplus
    the national debt kept increasing due to the fact that Australians could borrow as much as they wanted from the banks, who in turn borrowed overseas.

    Comment by THEODOOR — November 24, 2008 @ 1:05 pm

  8. Theodor, the government is only one entity with the ability to borrow. The national debt is the sum total of all borrowings, and is a capital amount. Depending on whether the government is a borrower or not it may or may not contribute to that.
    The budget deficit or surplus is essentially a cash flow figure, so is only one part of the total assets or liabilities of the government.
    You also have to consider the value of assets that a government owns, particularly liquid assets. It might be that the government is borrowing money but has more than enough assets to cover the borrowing, so it might then claim to be “net debt free”.
    Probably doesn’t make it much clearer I’m afraid. But they write text books about these sorts of things.

    Comment by Graham Young — November 24, 2008 @ 1:33 pm

  9. The Americans bale out insurance companies and banks.The muck hasn’t hit the fan here yet and the Rudd mob have baled out child care centres!!!!!
    Has this government gone mad.

    Comment by alf welch — November 24, 2008 @ 1:47 pm

  10. Careful, alf. They’re bailing out childcare because the previous government delivered an essential service into the hands of spivs. If you want to know what happened to childcare in this country, ask Larry Anthony and Sallyanne Atkinson – formerly of the ABC board. The current government are simply cleaning up the mess.

    Comment by Jason — November 24, 2008 @ 1:52 pm

  11. Hey Jason, I think I need to do another post on ABC Childcare and how the receivers shook the government down for $20 M. BTW, the business has been in existence for over 20 years, long before Howard came to government.

    Comment by Graham Young — November 24, 2008 @ 2:38 pm

  12. Theodor, Australia tends to have national debt because there are far more globally attractive investment opportunities in Australia than can be funded locally. Investment in viable commercial opportunities creates wealth, jobs and higher incomes. In the 1980s, the ND was dominated by government borrowing, mainly for non-commercial state government projects, and was a real worry – a very high proportion of state spending went on debt servicing, generally with little or nothing to show for it. Subsequently, government debt at both federal and state levels declined significantly (“fiscal responsibility”), the current debt has generally been incurred by the private sector to underpin 17 years of economic growth. The recent splash-the-cash actions of the Rudd government seem to have little rationale in terms of either short-term or longer term community benefit; bringing forward some worthwhile reform ideas from the tax review might have been a better way to provide a stimulus.

    Comment by Faustino — November 24, 2008 @ 3:22 pm

  13. The UK Treasurer-equivalent has been using Keynes to justify massive intervention. A Times’ editorial today cautions that –
    “Keynes was far from being an unreconstructed advocate of government budget deficits, and he rarely explicitly supported that policy. He believed that public works projects could stimulate aggregate demand if they gave confidence to business and thereby helped to generate a more reliable stream of private investment.
    “Mr Darling will maintain that his plans are designed to bolster confidence. He needs to ask the reasons why the economy is in that malaise. Confidence among manufacturers is at its lowest level for 30 years. Consumer confidence has been shaken severely by the collapse in the housing market. Bank lending has frozen up because the banks are worried about not getting their money back. These are not natural catastrophes. The depressed state of consumer and business sentiment is attributable to specific failures on the part of policymakers, regulators and bankers. …
    “The UK’s structural deficit has widened substantially in recent years: in 2007-08 it amounted to £38 billion, or 2.7 per cent of GDP. A temporary fiscal stimulus, such as the Chancellor envisages, is intended to stabilise the economy. …
    “There is a risk that by easing fiscal policy further, the Government may merely undermine confidence if businesses and international investors do not believe there will be an offsetting fiscal contraction – cutting spending and increasing taxes – when the economy eventually recovers.”
    Do Rudd’s measures engender confidence? Not in me.

    Comment by Faustino — November 24, 2008 @ 3:55 pm

  14. I wonder if Kevin does his budgeting decifering on the back of a Qantas Coaster whilst approaching the stratosphere.Will he ever come down?
    It can make you a bit lightheaded especially when dreaming of that future UN posting.
    I hope that they haven’t borrowed the $10 billion since our falling dollar will again give more pain to the tax payer.

    Comment by Arjay — November 25, 2008 @ 6:18 pm

  15. I think Rudd should spend the money to stimuate the economy but should consult the reserve

    Comment by H — November 28, 2008 @ 12:29 am

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