A conventional Keynesian economic analysis would take the view that running a budget surplus tends to be contractionary, reducing the aggregate demand for goods and services and thereby slowing growth in output and employment. From that perspective, one could regard Costello's surplus projected of over $10 billion as a conservative fiscal policy stance, taking much more away from the spending capacity of Australian taxpayers that it ploughs back in to the economy in the form of government spending.
However, the prevailing view is that the fiscal stance is expansionary. This is because the budget surplus for the year ahead is much lower than that which would normally occur, given the sustained growth of the economy in recent years and the massive incomes generated by the current boom in minerals prices and exports. It is this spectacular economic buoyancy that has enabled the government to cut various taxes - on incomes, on superannuation and on business - while still maintaining a surplus. Costello's budget thereby returns some of the proceeds of the current economic bonanza to the general public, while still appearing economically responsible, by the standards of modern market economists.
The problem with this strategy is that an expansionary fiscal policy seems oddly juxtaposed with a mildly contractionary monetary policy. The Reserve Bank of Australia has recently raised official interest rates by a quarter of a percentage point. This reflects fears of inflationary pressures in the economy, partly driven by the rising price of petrol. The effects of that rise in interest rates are likely to be swamped by the increased consumer spending that the Treasurer has now facilitated.
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