Gittins on the surplus

Labor brings a fresh eye to the economy — and pre-election baggage

The link is to Ross Gittins' column on the Labor government's plan to build up a bigger surplus as a way of helping curb inflation. (Yes, just as you need more money to pay for your mortgage, you may be about to have less of it if you are employed by the Commonwealth, or rely on some of its benefits.)

I think I can take quite a lot of support for my skepticism of the value of this exercise from Gittins piece. His message is that it really could be politically damaging to Rudd, as he is taking on more direct responsibility for inflation, yet the budget cuts that are politically palatable are hardly likely to make any significant difference anyway. In other words, those who suffer from the budget cuts won't really be able to see the point of them in either the short or long term. Here's the crucial paragraphs from Gittins' column:

The most recent estimates say we'll end the present financial year with an underlying cash surplus of 1.3% of GDP. So for Mr Swan to say he's raised the target surplus for next financial year from 1% to 1.5% is to promise a change in the stance of fiscal policy of negligible proportions.

My guess is that, to produce a change capable of being taken seriously by the Reserve, Mr Swan will need to budget for a surplus of at least 2.3%. That is, one expected to be at least $10 billion higher than last year's.

The spending cuts needed to jump that hurdle would require much hard work, toughness and bravery on the Government's part.

But even if it can rise to the challenge, the political reward is uncertain. For one thing, a contribution from fiscal policy of this size is unlikely to substitute for more than one 0.25 percentage point rise in the official interest rate, and there are likely to be a few more this year beyond the one expected tomorrow.

If I read that right, Gittins is saying that even a budget surplus of 2.3% would save the equivalent of one .25% interest rise? Well, I'm sure those who are directly hurt by the budget cuts will appreciate the vast difference their loss will make. Ha.

Why bother with the exercise at all?