Bogus budget worries

Earlier this week, some members of Canberra’s press gallery where criticised for asking Julia Gillard about the potential impact of the Queensland floods on her Government’s plan to return the federal budget to surplus.

Gillard played a straight bat, saying the cost of the relief and recovery effort could mean there were some “tough choices” ahead.

But some thought she should have given another answer along the lines of, “I’ve got much more important things to worry about right now”.

There’s been more discussion about the surplus issue in the coming days. According to a report in the Australian Financial Review, JP Morgan’s chief economist Stephen Walters warned that if the repair bill got as high as $7 billion, the Government could need to find $4 billion in savings to get the budget back into surplus.

Other economists say the impact on the surplus will be much less. But here’s another question – does it even matter if the budget were to stay in deficit for a year longer than planned, given what are clearly unique circumstances?

The short answer from CommSec’s chief economist Craig James was no. He says the size of any deficit would be so small that it would not create broader problems, like putting upwards pressure on interest rates.

While we all want to see the budget back in surplus sooner rather than later, there are times when going into deficit (or in this case, retaining a small deficit) is warranted. We won’t know until the clean-up details become clearer, but this could well be one of those times.