Deficit Demons, Now Australia falls Victim

31 Dec, 2013 | Articles

Why, oh why are we all so scared of a deficit?

Don’t get me wrong, Im all for responsible government budget management, but we need to put things in perspective. The global economy remains fragile and against that backdrop the governments of the world SHOULD have as priority Number 1 “lets not slip into recession as we try to get out of the mess of the Global Financial Crisis*”.

Different economist of different persuasions see the world differently, but almost all agree that cutting government spending dampens economic activity and demand. So how does it make sense to have monetary policy in full stimulus mode (interest rates low, and piles of quantitative easing), the majority of fiscal policy geared towards stimulus (government stimulus programs, tax incentives etc) and then overlay onto this with a massive cut in government spending?

To use a driving analogy, its like trying to accelerate off the lights while simultaneously pulling on the handbrake.

Australia is the latest victim if this insanity – with Joe Hockey softening the country up for huge spending cuts in the 2014 budget.

This is a dangerous game and with opposite forces pulling the country’s vulnerable economy in different directions, its very hard to predict the outcome. Lets hope that the Australian political system doesn’t turn the near miss Australia experienced through the GFC into a deeper, darker recession than what other countries experienced in the recent past.

*Many Australians proudly refer to the the “Global Financial Crisis” as the “North Atlantic Financial Crisis” due to the fact that Australia was relatively unaffected by the GFC.