All treasurers – and, to be honest, those who write about the budget – should have the mantra: don’t worry about budget surpluses or deficits, worry about the economy.
There was a sort of glorious irony that a budget surplus has been delivered after so many years of deficits and no one really cared too much.
The government even announced the surplus the night before budget day in order to get a raft of newspaper front pages. In past years, a surplus would be enough to warrant a surge of positive coverage the day after, but this time round, it rather lacked the type of sales pitch such a situation normally would present:
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When you look at the history of budgets, you can see why this is a bit of an odd surplus not given to massive praise.
As a rule, budgets go from deficits to surplus slowly and with fairly constant progressions. But this time around we skipped a few steps and went straight to a surplus and then back to a deficit.
The March 2023 budget had a more typical progression of budget deficits, but that was mostly because the treasury wildly overestimated the budgetary impact of the pandemic (not their fault, we all did).
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The reason of course is that the economy here and around the world remains very weird. The pandemic plus the Russian invasion of Ukraine led to a surge in prices for gas, coal and iron ore that meant the level of company tax expected to be raised was much higher than was the case just last October:
For an interactive version of this chart, click here
There was also some shuffling around of spending – such as in defence – that meant the level of expenditure was able to be reduced this year, and – huzzah – we had a budget surplus.
And yet, instead of getting great plaudits, the main response from more conservative sectors – including those who in the past have talked up the glories of budget surpluses – is that this budget will actually drive inflation because it is “expansionary”.
The problem with this is that it relies on a pretty basic analysis of the budget.
Normally when a budget deficit gets bigger (as we are seeing over the next few years) that means a budget is expansionary because the government is putting more money into the economy than it did the previous year (once you take away revenue).
But as we know (and even the opposition has been arguing) this year’s surplus was a bit of a one-off that came about purely because of the weirdness of the world economy and gas and coal prices.
When we look at policy and parameter changes since last October you can see that the changes to estimates on the economy and prices of commodities has done all the work:
For an interactive version of this chart, click here
Talk about whether a budget is expansionary or not really is about the impact of policy choices. It has nothing to do with whether or not a budget balance is changing purely because abnormal coal and gas prices are not going to keep providing massive levels of company tax.
Similarly, the government and RBA expect unemployment to rise. That will reduce income tax and raise government spending due to more people on unemployment benefits.
But that is not expansionary – it just is what economist call an “economic stabiliser” – ie it works to keep the economy stable. The only expansionary aspect of unemployment benefits is the decision to increase them by $40 a fortnight.
And well, please. If you think giving people living well below the poverty line $20 a week extra is going to set off a level of demand in the economy that will have shops raising prices, you really need to spend some time living on $50 a day.
The same is true of the changes to Medicare, which will increase spending by $1.37bn next year. No one thinks that because they bulk bill at a GP they actually have more money to spend. Like the $500 reduction of energy bills, it is a hidden benefit. You don’t actually feel it in the way you would if you were given a $500 cheque.
As a result the impact on overall demand is muted.
We know the budget is not really expansionary because we can look at the forecasts for “public demand”. This tells us how much the public sector is working to increase demand (and thus inflation) in the economy.
The treasury is predicting public demand over the next two years will be much more like what we saw when Joe Hockey decided austerity was a smart policy than during any period (such as the pandemic of GFC) when budgets have been truly expansionary:
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This is important, not just because it won’t increase inflation, but because in many ways the problem is the budget is not more expansionary.
The treasury and the RBA are forecasting some pretty dark years ahead. GDP growth is set to be below 2% for two calendar years and household consumption growth is predicted to grow well below the long-term average:
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That is not a time to be trying to slow the economy. There has not been much talk about that because the narrative is dominated by interest rates and inflation. But this time next year there won’t be the surplus to cover the weak economic figures.
And worries of a budget deficit or surplus will be more likely replaced with worries about an economy struggling to grow.
• Greg Jericho is a Guardian columnist and policy director at the Centre for Future Work
