Managing the budget deficit

Abstract

With the federal budget released, discussions about the size of the deficit have once again come to the fore. It can, however, be entirely appropriate for a budget to be in deficit. In a period when spare capacity exists, as is currently present, a deficit is to be expected. Aggressively trying to balance the budget when the economy has spare capacity is likely to be counterproductive. Fiscal consolidation (budget repair), however, is necessary in the near future and discussions about the budget should focus on whether the policies adopted by the Government will deliver this in a desirable way rather than just the bottom line.