Budget Deficits and the Dual Roles of Fiscal Policy

Melbourne Institute Policy Brief No. 03/16

Date: 2016


Guay Lim
Tim Robinson
Viet Hoang Nguyen


The federal budget has been in deficit since the Global Financial Crisis. This article draws attention to two key aims of fiscal policy - to smooth the business cycle and to promote a more equitable society. Since budget deficits are natural outcomes of the economic environment as well as reflections of fiscal policies to achieve social and economic goals, we argue that there are times when government deficits can be entirely appropriate. This is especially so when spare capacity in the economy exists. The current state of the economy means that running a deficit is to be expected, but some fiscal consolidation is appropriate in the near future. In this regard we provide an evaluation of how Australia's income distribution and spending on education and health compares internationally, discuss Australia's potential future infrastructure needs, its budgetary implications, and the public/private mix behind expenditures on innovation, investment and infrastructure.

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