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Returning to surplus in 2012-2013: the case for and against

Downward trend: how should Australia respond to this week’s global meltdown? AAP

In the midst of global stockmarket turmoil, talk of a double dip US recession and global downturn, focus is turning to whether the Labor federal government should stick to its promise to return Australia’s Budget to surplus by 2012-2013.

We asked two well-known economists to present the case for, and the case against.

Sinclair Davidson, RMIT:

If not a surplus, a balanced budget.

In late 2008 the federal government was under some considerable pressure to abandon any plans of delivering a budget surplus in that year.

I wrote an op-ed for the Australian Financial Review arguing that while budget deficits could occur after the fact, the government should never plan for a deficit.

Fast forward nearly three years and again the government is under some pressure to abandon plans to produce a budget surplus.

Lord Keynes famously said that when the facts changed he changed his mind, what did others do? Well, the bottom line is that the facts have not changed – government spending has a poor track record of stimulating the economy.

So I’m still of the opinion that if the government were to adopt an active policy towards stimulating the economy, spending should not be that policy.

Read the full article here.

The case against:

Saul Eslake, Grattan Institute:

We should drop this insistence on a surplus.

It would risk exacerbating what would already be a more fragile economic situation than had been anticipated when the objective of returning the Budget to surplus was initially formulated.

Wayne Swan has previously said, in defending that objective, that “if we are to be Keynesians in the downturn, we have to be Keynesians on the way up again”.

That’s absolutely correct. Keynes is also supposed to have said “when the facts change, I change my mind” (although I have never found it in any of his writings that I’ve read).

Nonetheless, if we do find ourselves confronting a renewed downturn in the Australian economy, then whether we call ourselves Keynesians or not, the right thing to do would be to drop the insistence that the Budget must be in surplus in 2012-13.

Read the full article here.

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