Should governments run budget surpluses?

• Tweet

• Tweet

Ask any politi­cian if gov­ern­ments should run sur­pluses and the answer is likely to be a resound­ing yes, with the ratio­nale being that gov­ern­ments should “live within their means”.

Pre­cisely this rea­son was given by the Aus­tralian National Com­mis­sion of Audit, which has been charged by the Abbott gov­ern­ment with the task of sug­gest­ing ways to rein in gov­ern­ment spend­ing. Its first report gave as the very first of its “Prin­ci­ples of good gov­ern­ment” the mantra that gov­ern­ments should:

Live within your means. All gov­ern­ment spend­ing should be assessed on the basis of its long-term cost and effec­tive­ness and the sus­tain­abil­ity of the nation’s long-term finances (Exec­u­tive Sum­mary, National Com­mis­sion of Audit).

The anal­ogy behind this prin­ci­ple is that gov­ern­ments are like com­pa­nies, and should there­fore have strong bal­ance sheets:

For gov­ern­ments, as with com­pa­nies, a strong bal­ance sheet is impor­tant (What should gov­ern­ments do?, National Com­mis­sion of Audit).

To achieve this strong bal­ance sheet, the Aus­tralian government’s goal is to achieve a sur­plus equiv­a­lent to 1 per cent of GDP within a decade and pre­sum­ably to main­tain it from then on…

Click here to read the rest of this post.