This article originally appeared on the Business Spectator website in October 2013: Here 

Budget complaints bark up the wrong tree

With this being my second to last article for Business Spectator, I want to deal with the concept of good economic management.

Don’t let this put you off, but the issue of what is a ‘good economic manager’ has been clouded by the hysteria of recent years and what has generally been an unquestioning dogma on what economic policy is all about.

Let’s start at the end.

At a macroeconomic level, if policy makers in Australia can deliver annual GDP growth at 3 per cent, inflation between 2 and 3 per cent, an unemployment rate at 4 or 5 point something, and preside over rising living standards, this is almost perfect. It is as good as it gets.

For all credible economists, this is the unquestioned, universally agreed end game for policy makers.

The budget surplus or deficit, level of debt, interest rates and value of the Australian dollar are the tools used to achieve those objectives and are not the target in themselves.

This is a fact so often overlooked in the misrepresentations of low interest rates as good, the level of government debt as bad and the deficit as a sign of mismanagement. Many people mistakenly think these should be the target and not the levers pulled by policy makers.

Think about it.

What good would a budget surplus be if the economy were in recession and the unemployment rate were 8 or 10 per cent?

What good are low interest rates if 5 per cent inflation is eating away at consumer purchasing power and Australia’s international competitiveness?

Or, perhaps viewed the way it should be, how good is it when policy makers run a temporary budget deficit to keep the unemployment rate at 5 point something or that high interest rates cool the economy to lock in low inflation?

It comes back to the point I have often made in my Business Spectator writings. Any monkey with an excel spreadsheet can deliver a budget surplus. Cut government programs and spending and hike taxes and there you have it, the budget is in surplus.

This simple approach is unhelpful as it takes no account of the position of the business cycle.

A budget deficit is like a cold and rainy day.

Is a cold and rainy day good or bad?

If you are holiday maker at the beach then clearly no, it is dreadful. But if you are a farmer on land that has not received much rain over the prior two years then having the skies open and widespread rain is delightful.

So too is a budget deficit. In a booming economy, a deficit is inappropriate, while in a period of weak growth, it is highly desirable.

This is why suggestions that one side of politics or the other will have lower interest rates or will always have a surplus are misguided.

It is what happens to GDP, inflation and unemployment that largely determine the level of interest rates, and the state of the budget and whether the economy has been well managed.

And what’s more, bad luck can get in the way of the best policy settings. A global recession, an inexplicitly overvalued Australian dollar or a natural disaster can have consequences for policy bottom lines and the real economy.

If the world is weak, interest rates will inevitably be lower and the budget more inclined to be in deficit. And that is the way it should be, because these policy reactions will help to insulate the local economy from the negative global news. It would smack of policy incompetence if interest rates remained high and the government cut spending and hiked taxes to ensure the budget stayed in surplus.

And this is the notion I have always had at the forefront of my thinking when writing about the budget, government debt and interest rates for Business Spectator. Many of those loyal readers commenting on my articles share a different view. However that view implies a preference for recession, high unemployment and a budget surplus, to the alternative that we have seen over recent years.

In the end, Australia’s economy is in quite spectacular shape. It is into its 23rd year without a recession, it’s been more than a decade since unemployment has been at 6 per cent and inflation over the last two decades have averaged 2.5 per cent. At the same time, Australians are among the richest people in the world with the International Monetary Fund data showing per capita GDP in US dollar terms fifth in the world behind only Luxembourg, Qatar, Norway and Switzerland. That is hugely impressive.

It seems someone has got the macroeconomic policy settings right and for that we should be very pleased.