Monday, November 28, 2011

MYEFO. It'd be best not to cut

We wouldn't if we weren't so insanely obsessed with surpluses

It’s dangerous to cut the budget right now and Wayne Swan knows it.

He acknowledged yesterday it would be “counterproductive to take an axe to the budget in these uncertain times”. But he’ll do it anyway this week because he feels he has to in order to continue to credibly forecast a budget surplus in 2012-13.

The Commonwealth budget is massive. It amounts to one third of a trillion dollars. Whether it is in deficit or a surplus by a few billion matters not at all. Scaled down to a household’s budget it is the difference between spending or saving $1000.

But whereas it might help a household to reign in its spending (unless it was going short on food) it can hurt an economy for a government to reign in its spending when things are uncertain.

The Reserve Bank warned this month a deep recession in Europe would represent “a downside risk for the Australian economy”. Households are already shutting their wallets and businesses and holding off hiring in anticipation of such a risk... Cutting household welfare and cutting corporate welfare will unsettle them further.

Early indications point to billions of dollars of corporate welfare cuts and at least one cut to household welfare - taking away the $258 maternity immunisation allowance paid to all families of fully immunised children aged up to five.

There may well be good reasons to make such cuts in normal times. But these are anything but normal times. Prudent economic managers prune lightly or not all when things look edgy.

The Treasurer is doing it because the jibes about never delivering a surplus in four budgets have got to him. But it was right not to deliver a surplus during one of the greatest global recession on record. It is almost certainly right not to deliver one now. We better hope he cuts carefully.

Published in today's SMH and Age

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