The Australian government debt problem

There is an unhealthy obsession with balancing the budget in Australia. Politicians constantly tell us they will "return the Budget to surplus" faster than their opposition as if this is unquestionably a goal that is worthy of pursuing.

Following the Great Depression governments embraced the idea of maintaining full employment through manipulating Aggregate Demand, which they did by varying the size of the government Budget deficit (or surplus). Today the New Classical view is that the private sector should allocate resources and governments should spend less and balance their budgets.

New Classical ideas were put aside in the GFC when it was clear only government action could save the global economy from catastrophe. The Australian government, like every government in the developed world ran larger Budget deficits and the worst outcome was, only just, avoided.

Today Australia is warned that if the government does not cut the deficit Australia will lose its top 'credit rating' of AAA. Only eight countries in the world have this. A high credit rating means that the government can borrow more cheaply than countries with a poor credit rating. A poor credit rating means that you are more likely to fail to repay a debt.

There is no doubt that the May Australian Federal Budget will make a great deal of cutting the deficit. And the dire consequences of not doing so.

However is this really that important? The UK has a lower credit rating (AA) yet can borrow more cheaply than the Australian government. The UK has a much higher debt also (as a percentage of GDP). Indeed most OECD countries are much more heavily in debt as the table below shows.

The trade off for a lower government deficit is lower Aggregate Demand. The New Classical argument is that government spending just replaces private sector spending and the private sector spends the money more efficiently. This is why they emphasize cutting spending and not raising taxes as a way to cut the deficit.

Would Australians rather have a comprehensive public health service (like the UK NHS) an education system that educates 90% plus of school children well rather than the 60% at present and would they like 3% not 5%+ unemployment? Or would they prefer a lower government Budget deficit?

The Ghana News covers the credit rating issue here

VCE students need to track the state of the Federal Budget closely and the policies introduced to change the size of the deficit and influence the economy. IB students need to understand the different schools of thought on macroeconomics (Keynesian vs Classical) and also be able to judge the effectiveness of fiscal policy.