The Budget surplus we don’t want (but need)

Let me start with an uncomfortable truth:

If the Australian government announced a meaningful Budget surplus today, plenty of people would be furious.

Not a bit disappointed. Furious.

We’d hear that Canberra was “out of touch”. That it was “ignoring struggling families”. That it was “hoarding money while people are doing it tough”.

And politically, that reaction is exactly why we’re unlikely to see one.

But here’s the thing – and it matters more than the politics:

A Budget surplus right now would probably be one of the most effective forms of cost-of-living relief the government could deliver.

Not because it hands out cash.

But because it helps stop taking it away (via inflation) in the first place.

Before we go further, we need to introduce a concept that doesn’t get nearly enough airtime (but you’ve probably read from me before): structural Budget balance.

In plain English, it’s this: what would the Budget look like if the economy were running at a normal, sustainable pace?

Not booming. Not in recession. Just… steady.

That matters because government revenues and spending naturally move with the economic cycle.

When times are good, tax receipts surge – more people working, higher profits; more income tax and company tax flowing in.

At the same time, welfare spending tends to fall, particularly unemployment benefits.

The Budget can look healthy – even in surplus – without any real policy effort.

Flip that around in a downturn and the opposite happens. Revenues fall, spending rises, and deficits appear.

Again, often automatically.

So when we talk about surpluses and deficits, we need to separate what’s cyclical (driven by the economy) from what’s structural (driven by policy settings).

Because it’s the structural position that really tells us whether fiscal policy is helping or hurting.

And let me be clear: deficits aren’t inherently bad.

In fact, at the right time, they’re exactly what you want.

When the economy is weak – businesses cutting back, unemployment rising, households tightening their belts – government spending can step in to support demand. And automatically!

That’s not theoretical. It’s practical.

More spending keeps people in jobs. It supports incomes. It prevents downturns from becoming something worse.

Think back to the pandemic, or the global financial crisis.

Deficits weren’t a failure of policy.

They were the policy.

As I often say: prepare, don’t predict. And part of that preparation is recognising that sometimes the government needs to support the economy.

But – and this is the bit we tend to forget (some of us just because… our politicians, probably on purpose) – the opposite is also true.

When the economy is running hot, deficits become part of the problem.

Because when the government spends more than it collects, it’s adding demand.

More money chasing the same goods and services.

And when demand runs ahead of supply?

Prices go up.

That’s where we’ve been. It’s where we are now.

And it’s what the RBA confronted on Tuesday.

When inflation rises, the RBA steps in, lifting interest rates to cool things down.

Higher rates reduce borrowing, slow spending, and – eventually – bring inflation back under control.

But here’s the key point: fiscal policy (the Budget) and monetary policy (interest rates) are working against each other.

The government is running stimulatory deficits while the RBA is trying to slow the economy with higher rates.

Which, if you sit with it for more than 30 seconds, is maddening.

One pressing the accelerator.

The other hitting the brakes.

But a Budget surplus would change that dynamic.

Instead of adding demand, the government would be taking more out of the economy than it’s putting in.

That reduces overall spending power.

Less demand means less pressure on prices.

And less pressure on prices means the RBA doesn’t need to push interest rates as high – or keep them there as long.

So while a surplus doesn’t feel like “relief” – no cheques, no rebates, no big announcements – it works in a quieter, more powerful way.

It pushes back against inflation.

And by doing so, lessens the need for higher interest rates.

For mortgage holders, who otherwise bear the full brunt of monetary policy, that’s real relief.

The other thing? Australia hasn’t just been running deficits at the wrong time in the cycle.

We’ve been running structural deficits for a long time.

In other words, even when the economy is doing reasonably well, government spending is still exceeding revenue.

That leaves us with very little room to move when things go wrong.

If you’re already in deficit during the good times, what happens when the bad times arrive?

You go deeper into deficit.

And rack up far more debt.

And as a result, future governments have fewer options. Future budgets have higher interest expenses to pay, reducing the money available for other programs and/or the ability to lower taxes.

A structurally balanced Budget – or better yet, a small structural surplus – gives policymakers flexibility.

It means they can afford to run deficits when they’re needed.

Without putting long-term pressure on the system.

If the logic is this clear (and I think it is!), why aren’t we aiming for structural balance – and running surpluses when the economy is strong?

Because politics isn’t economics.

A surplus requires restraint. It means saying “no” – or at least “not now” – to spending demands.

It requires a population to understand and to vote accordingly, too. (Not for one party or another… just to resist voting for whoever gives out the most handouts, whatever the long term cost!)

Right now, those demands are loud.

Households are under pressure. Prices are high. Mortgage repayments have jumped.

All of that is real.

But here’s the thing: the spending designed to provide relief can end up prolonging the problem.

More spending means more demand… which means more inflation… which probably means higher (or a longer wait for lower) interest rates.

Round and round we go.

We, and our politicians, are the problem.

We want lower prices.

And lower interest rates.

And lower taxes.

And more government support.

And no cuts to services.

…At the same time.

Unfortunately, economics doesn’t work like that. We don’t have a magic pudding.

Good governance means different parts of the cycle require different responses.

Deficits when the economy is weak.

Surpluses when the economy is strong.

And, crucially, a structural position that gives us the flexibility to do both.

Now, none of this is to suggest governments shouldn’t help, when real problems are identified.

Of course they should… especially for those most in need.

But we also need to recognise that not all help comes in the form of a handout or subsidy or discount.

Sometimes, the best help is the kind that reduces inflation.

That brings interest rates down sooner.

That takes pressure off the system as a whole.

Right now, that kind of help would look a lot like a Budget surplus.

Bottom line?

Governments need courage, and we need to vote thoughtfully, telling our pollies what we want.

This is what that looks like:

Running deficits when the economy needs support.

Running surpluses when it doesn’t. (And when it needs cooling!)

And aiming, over time, for a structurally balanced Budget that gives us room to move.

Because the alternative – permanent deficits, short-term fixes, and policy driven by fear of backlash – doesn’t make us richer.

It leaves us more exposed.

And, ultimately, worse off.

Fool on!

The post The Budget surplus we don’t want (but need) appeared first on The Motley Fool Australia.

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Motley Fool contributor Scott Phillips has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.