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Professor Guay Lim
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Australia’s existing economic policy settings and our politicians' obsession with returning the country to surplus are sending mixed signals, a University of Melbourne study has found.


The report — Budget Deficits, Business Cycles and Macroeconomic Policies — argues budget deficits are a natural outcome of business cycles and act as fiscal stabilisers that counter effects associated with downturns such as job losses and a fall in GDP.


The research highlights that Australia has one of the lowest gross debt to GDP ratio’s in the world (33%), compared to other developed economies such as the UK (104%), US (106%) and Greece (166%). 


“It has been five years since the onset of the GFC and Australia’s budget is still in deficit but there is an unnecessary fixation with achieving a budget surplus,” explained Professor Guay Lim, who is based at the University’s Melbourne Institute of Applied Economic and Social Research


“In an economic environment of low growth, budget deficits play a valuable role in alleviating the hardships of economic downturns.”


The analysis charts Australian government spending over 10 years and found it took five years after the 1980’s recession and seven years after the 1990’s recession for Australia’s fiscal balance to return to surplus.


The study questions whether the RBA’s monetary policy (cutting interest rates) and the government’s tight fiscal policy (to decrease the deficit) can operate in unison.


“Both levers of Australian economic policy are working in opposite directions, with tight fiscal policy versus loose monetary policy,” Professor Lim said.


“To use the analogy of a car – one foot is on the accelerator while the other foot is on the brake. The outcome for the economy, as in a car, is that both actions cancel each other and the longer this is done, the greater the likelihood of damage.”