Australian Federal Budget Surplus $11.5 Billion

And, of course, Peter Costello looks exceptionally happy in the ABC news report on this subject (even though it may actually be a file photo to make him look pleased).

When it comes to the Federal Budget, I'm very much a Keynsian. At the moment the Australian economy is running well, which means that there should be no reason to either spend the surplus (the left-wing suggestion) or reduce taxes (the right-wing solution). I believe that, over the course of the business cycle, surpluses should be matched by deficits to ensure a neutral position over the long run. That is, unless there needs to be some long-term debt recovery going on.

According to the CIA World Factbook, Australia's public debt is around 17.4% of GDP. If my calculations are right (and they may not be), this new surplus would have reduced public debt to about 16.5%. I don't think this surplus takes into account bonds that have been paid off in full, which means that the 16.5% figure I have come up with may, in fact, be overly pessimistic. Australia may have its public debt down to below 13% of GDP.

Given the financial and social "panic" caused by Labor's deficits up until 1996, the fact that Federal budget surpluses have whittled away public debt to such a low level is noteworthy. Whatever else that Howard and Costello have done (which I have not been silent about), at least we can thank them for getting this one area of our economy under control.

It needs to be pointed out, however, that Australia's low public debt level is probably the best in the industrialised world. Take into account these figures from the CIA:

South Korea: 21.3%
New Zealand: 22.1%
Mexico: 23.5%
Russia: 28.2%
Ireland: 31.2%
Norway: 33.1%
Iceland: 35.9%
UK: 39.6%
Denmark: 42.5%
Finland: 46.8%
Sweden: 51.6%
Brazil: 52.0%
Spain: 53.2%
Netherlands: 55.8%
Switzerland: 57.2%
India: 59.7%
Austria: 64.2%
USA: 65.0%
Germany: 65.8%
France: 67.7%
Turkey: 74.3%
Belgium: 96.2%
Italy: 105.6%
Greece: 112.0%
Argentina: 118.0%
Japan: 164.3%

When governments get into debt, they are naturally required to service that debt in the form of interest repayments. If a government gets into a sizeable debt (say, anything beyond 50% of GDP), then interest repayment becomes a larger and larger percentage of general expenditure.

What this means is that when a government begins to work out its expenditures, a smaller proportion of government spending is spent on important things (like education, health and law & order) simply because the amount of money required to pay back interest is growing.

And, of course, the bigger the debt becomes, the harder it is to continue running huge debts to keep public spending going. At some point, a government will begin to pare back its expenditures to try to control debt levels.

So, in order to control debt, many of these industrialised nations have two basic choices - either they can make massive spending cuts, or they can raise taxes. Either way, countries like the USA, Italy, Germany, France, Belgium, Japan and Greece all need to run significant surpluses in order to kill their public debt levels.

Sadly, running budget surpluses will force an economic downturn, even a recession, in the nations involved. But this is far more preferable to the even greater recessionary effects that will occur if debt levels are not pared back.

Already unemployment in Europe is high - a situation that I think is partly the result of unsustainable debt. There is a vicious cycle at hand whereby deficits are compounded by lack of revenue due to high unemployment levels, which are increasing partly because of unsustainable debt levels.

Of course, Australia's situation is not really that great. Much of the surplus has come about because of economic activity that promotes a current account deficit. In other words, the Aussie government has reaped some benefits from foreign investors. When the current account eventually rebalances (and it will), the government will lose a large slice of revenue which, hopefully, they will regain as the economy rebalances.

© 2005 Neil McKenzie Cameron, http://one-salient-oversight.blogspot.com/

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