The surplus we can’t afford (but must have)

Understanding the Budget Surplus Dilemma

It’s an uncomfortable truth that if the Australian government announced a meaningful Budget surplus today, many people would react with anger rather than relief. This reaction is not just about disappointment; it’s about fury. The public might accuse Canberra of being “out of touch,” of “ignoring struggling families,” and of “hoarding money while people are doing it tough.” Politically, this response is one of the main reasons we’re unlikely to see a real Budget surplus in the near future.

However, there’s an important point that often gets overlooked: a Budget surplus right now could be one of the most effective forms of cost-of-living relief the government could offer. It wouldn’t involve handing out cash directly, but it would help prevent inflation from taking more money away from households in the first place.

What Is Structural Budget Balance?

To understand why this matters, we need to introduce the concept of structural Budget balance. In simple terms, it refers to what the Budget would look like if the economy were operating at a normal, sustainable pace—neither booming nor in recession, just steady. This is crucial because government revenues and spending naturally fluctuate with the economic cycle.

During good times, tax receipts increase as more people work and businesses profit. At the same time, welfare spending tends to decrease, particularly for unemployment benefits. This can create a Budget surplus without any significant policy effort. Conversely, during downturns, revenues fall, and spending rises, leading to deficits automatically.

When discussing surpluses and deficits, it’s essential to distinguish between cyclical and structural factors. Cyclical changes are driven by the economy, while structural changes are the result of policy decisions. The structural position tells us whether fiscal policy is helping or harming the economy.

Deficits Are Not Always Bad

Deficits aren’t inherently bad. In fact, they can be exactly what you want when the economy is weak. During periods of business cutbacks, rising unemployment, and tightening household budgets, government spending can step in to support demand automatically. This wasn’t theoretical—it was practical, as seen during 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. Part of that preparation involves recognizing that sometimes the government needs to support the economy.

But here’s the other side of the coin: when the economy is running hot, deficits become part of the problem. When the government spends more than it collects, it adds demand. More money chasing the same goods and services leads to higher prices.

This is where we’ve been and where we are now. The Reserve Bank of Australia (RBA) has confronted this issue, raising interest rates to cool things down. Higher rates reduce borrowing, slow spending, and eventually bring inflation under control.

Fiscal and Monetary Policy in Conflict

The key point is that fiscal policy (the Budget) and monetary policy (interest rates) are working against each other. While the government runs stimulatory deficits, the RBA tries to slow the economy with higher rates. This dynamic is maddening—one pressing the accelerator, the other hitting the brakes.

A Budget surplus would change this. Instead of adding demand, the government would take more out of the economy than it puts in. This reduces overall spending power, lessens pressure on prices, and means the RBA doesn’t need to push interest rates as high or keep them there as long.

While a surplus may not feel like immediate relief—no cheques, no rebates, no big announcements—it works in a quieter, more powerful way. It pushes back against inflation and lessens the need for higher interest rates, which is real relief for mortgage holders.

Long-Term Implications

Australia hasn’t just been running deficits at the wrong time in the cycle. We’ve been running structural deficits for a long time. Even when the economy is doing reasonably well, government spending still exceeds revenue. This 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, rack up more debt, and future governments have fewer options. Future budgets face higher interest expenses, reducing the money available for other programs 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 needed without putting long-term pressure on the system.

Why Aren’t We Aiming for Structural Balance?

If the logic is clear, 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, saying “no” or “not now” to spending demands. It also requires a population that understands and votes accordingly, resisting the urge to support whoever offers the most handouts, regardless of long-term costs.

Right now, those demands are loud. Households are under pressure, prices are high, and mortgage repayments have jumped. All of that is real. But the spending designed to provide relief can end up prolonging the problem. More spending means more demand, which leads to more inflation and likely higher or longer interest rates.

We, and our politicians, are the problem. We want lower prices, lower interest rates, lower taxes, and more government support—all at the same time. Unfortunately, economics doesn’t work that way. 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 it’s strong. And crucially, a structural position that gives us the flexibility to do both.

The Bottom Line

Governments need courage, and we need to vote thoughtfully, telling our politicians what we want. This means:

• Running deficits when the economy needs support.
• Running surpluses when it doesn’t (and when it needs cooling).
• 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.