Chilly economic winds are blowing – and budget fairytales are cold comfort

Two fairytales about economic management continue to hold far too great a sway over our public debate and the government’s economic policy. The first is the myth of household budget comparison and the second is what I call the grasshopper fable of government budgets.

The belief that the government should run its budget like a household really needs to die a quick death. We hear it all the time – and it underlies the whole “surplus is better than deficit” line that is practically considered a statement of scientific fact by too many otherwise sensible people in politics and the media (and by extension the voting public).

Your household’s expenditure needs are nothing like a government’s and your budgetary limitation completely opposite.

 

Households don’t get the opportunity to print money should they be a bit short when it comes to pay the bills. They also don’t get to borrow money at interest rates lower than inflation.

This week the interest rate for Australian government 10-year bonds went below 1%.

Show me a household that can take out a 10-year loan at a 0.96% rate, despite the fact that their level of debt has risen over the past six years from $257bn to $549bn, and I’ll start listening to you saying the government needs to budget like a household.

The second budgetary fairytale is based on the grasshopper and ant fable – that the government needs to build up its budgetary surplus when times are good for when winter hits and we need to have savings to rely on.