A shift to fiscal surplus in Australia would amount to a criminal act by government

The former head of the Australian Treasury claims that: “Everybody knows the budget should be in surplus right now.” Well last time I checked I was still part of the body of humanity and I don’t know that. In fact, the fiscal balance is currently recording a deficit (which should be referred to as a net public injection of financial assets to the non-government sector) which by all indicators is not large enough. The commentators that are blindly repeating the former Treasury head’s assertion really haven’t much idea of how the system works and what the implications of a shift to surplus would have for the overall prosperity of the nation and its people. They blindly rehearse fictions about fiscal deficits pushing up interest rates and leaving future generations worse off. The reality is that if the Federal government could somehow move to surplus, there would be a recession and the number of available workers who were either unemployed or underemployed (currently 10.9 per cent of the available labour force) would rise significantly. That would undermine the well-being of tens of thousands of workers and their families. The call for fiscal surpluses completely ignores the macro linkages that bind the sectors in the economy together. Such a shift would amount to criminal neglect.

When the Treasurer released his most recent fiscal statement (aka erroneously as ‘The Budget’) in May 2026, the former Treasury head was given the platform by the UK Guardian to air his views (May 13, 2026) – Jim Chalmers’ budget doesn’t fix everything – but it’s an overdue first payment to future generations.

He said then that:

At this stage of the economic cycle, the budget should be in surplus. It should not be adding tens of billions of dollars every year to the mountain of public debt.

In that article, the former Treasury head went on to argue that the Australian government should be “underwriting stronger productivity growth … delivering a much better deal for young Australian workers … ” etc.

It also said that the Government should be doing more to “protect and restore the environment” and he finished with this gem:

Australia has spent many decades writing cheques against accounts it does not own, taking from the “natural capital” of future generations and the fiscal resources of people not yet born.

This is a very confusing statement.

‘Natural capital’ is a resource concept and certainly one can argue that the Capitalist system is squandering the ‘natural capital of future generations’ because it is creating a climate catastrophe as a result of its largely unfettered resource depletion.

The “fiscal resources of people not yet born” is an entirely different concept.

For a currency-issuing nation such as Australia, those resources are identical to those available to the current generation, or past generations, for that matter.

The Australian government’s spending capacity is infinity minus a cent (given that infinity is not defined as a standard real number and currency is).

The current generation via the voting system effectively ‘chooses’ the fiscal parameters.

If a government defies that choice then they lose office.

The next generation have the same choice – they can choose whatever tax burden they take on.

However, the fiscal parameters influence the evolution of the private financial balances for reasons I will explain next.

That distinction goes to the heart of the matter I am discussing today.

In – ‘Budget Paper No.1’, Statement 2: Economic Outlook and Statement 3: Fiscal Strategy and Outlook – that were released by the Australian Treasury in May 2026, we observed the following forecasts.

Aggregate	2024-25 (Actual)	2025-26	2026-27	2027-28
Current Account (% of GDP)	-2.5	-1.8	-2.75	-4.00
Fiscal balance (% of GDP)	-0.4	-1.0	-1.0	-1.0

The forecasts also suggest that the fiscal balance will be -1.0 per cent of GDP in 2028-29 and -0.4 per cent of GDP in 2029-30.

Silent from the Treasury’s discussion was what these forecasts implied for the private domestic sector’s financial balances – that is, the implied change in non-government indebtedness.

Before I consider the implications, there was an Op Ed from the Melbourne Age’s Political and international editor over the weekend (August 1, 2026) – One bold, fiscal move would ease our economic anxiety. Does the PM have the nerve? – which chose to mimic the former Treasury head’s claim about what everybody thinks.

The tenet is that federal government “cost of living support” measures are :

… voodoo. They do nothing to change the pressures building inside the volcano. Worse, we know that the cost of these trinkets goes directly onto the national debt. And that only fuels the problem further.

Any fiscal support to lower income families in cash support or reductions in prices for essentials is hardly ‘nothing’.

Maybe the journalist’s salary is sufficient to insulate him from the pressures that the supply-side inflationary forces have created on household budgets.

Notice I use the term ‘household budget’ but eschew any use of the terminology ‘budget’ when discussing the fiscal situation of a currency issuing national government.

Household spending is financially constrained.

Government spending is not.

That is a huge difference.

The journalist then decided to seek authority from the former Treasury boss:

The government has an opportunity to grab this problem by the throat by putting the budget on a more sustainable trajectory that would provide insurance against future volatility … Everybody knows the budget should be in surplus right now … It’s not, of course. It’s exactly the opposite.

And thanks that is “exactly the opposite”.

The most recent labour force data revealed that the unemployment rate was 4.4 per cent.

In June 2026, underemployment rose 0.2 points to 6.5 per cent (rising 35.8 thousand to 1009.6 thousand).

The Broad Labour Underutilisation rate (the sum of unemployment and underemployment) rose 0.2 points to 10.9 per cent.

Overall, there are 1,696.4 thousand people either unemployed or underemployed.

When considering the ‘this stage of the economic cycle’ (with reference to the opening quote from the former Treasury head) that data tells me there is massive excess resource capacity in the Australian economy.

Nearly 11 per cent of available and willing labour resources are idle in one way or another.

That tells me that given the spending and saving decisions taken by the non-government sector, the government’s net financial position is too restrictive.

Given that that position is a deficit of around 1 per cent of GDP, that conclusion means that the fiscal deficit should move further into deficit to fill the spending gap left by the non-government sector’s spending decisions.

Looking back at the first Table, we see that the expenditure drain from the external sector is predicted to increase rather substantially over the forecast period as the predicted terms of trade decline significantly.

When the current account is in deficit, the currency flows into the country are less than the flows that leave the country.

Export flows add spending demand and increase national income, while import flows see income generated in the local economy lost in expenditure on foreign goods and services.

An external deficit then means there is a net outflow of spending from the nation.

Ally that with the knowledge that the fiscal deficit is forecast to decline from 1 per cent of GDP to 0.7 per cent over the course of the forward estimates.

So there are contractionary forces on domestic spending coming from the external sector and the move from a fiscal position of 1 per cent of GDP deficit to a 0.4 per cent deficit position.

Taken together it means that private domestic demand will have to do the lifting and that suggests rising indebtedness.

We know that the financial balance between spending and income for the private domestic sector (S – I) equals the sum of the government financial balance (G – T) plus the current account balance (CAB).

The sectoral balances equation is:

(1) (S – I) = (G – T) + CAB

which is interpreted as meaning that government sector deficits (G – T > 0) and current account surpluses (CAD > 0) generate national income and net financial assets for the private domestic sector to net save overall (S – I > 0).

Conversely, government surpluses (G – T < 0) and current account deficits (CAD < 0) reduce national income and undermine the capacity of the private domestic sector to accumulate financial assets.

Expression (1) can also be written as:

(2) [(S – I) – CAB] = (G – T)

where the term on the left-hand side [(S – I) – CAB] is the non-government sector financial balance and is of equal and opposite sign to the government financial balance.

This is the familiar Modern Monetary Theory (MMT) statement that a government sector deficit (surplus) is equal dollar-for-dollar to the non-government sector surplus (deficit).

The sectoral balances equation says that total private savings (S) minus private investment (I) has to equal the public deficit (spending, G minus taxes, T) plus net exports (exports (X) minus imports (M)) plus net income transfers.

All these relationships (equations) hold as a matter of accounting.

That accounting is created by the way national income changes impact on the various aggregate flows in Equation 1 above.

So the behavioural parameters for the aggregate flows are:

S – household saving – varies positively within GDP (income).

I – private capital formation – – varies positively within GDP (income).

G – government spending – varies inversely with national income because welfare spending falls in a stronger economy.

T – government tax revenue – varies positively with GDP – more people working, more tax revenue and vice versa.

M – imports (one part of the external balance) – varies positively within GDP (income) – we buy more of everything when our incomes rise.

So when, for example, the government cuts back on spending relative to taxation (G – T declines in size), which means total expenditure declines, unemployment rises, households earn less, and all those flows change in predictable directions until the accounting balance is restored at a lower level of economic activity.

The accounting statement really shows how the three sectors are intrinsically interlinked.

If one sector changes its spending behaviour then the consequences will reverberate through to the other sectors via the linkages shown above.

What that means is that making simple statements like:

“the budget should be in surplus”

This cannot be understood without reference to what a fiscal surplus would mean for the other balances – external and private domestic.

The private domestic balance, in particular, tells us, among other things, what the direction of private indebtedness will be.

So if the private balance is in deficit – meaning the households and firms, collectively, are spending more than their income, then over time, that means that indebtedness must be rising, given that the private sector faces a financial constraint.

Here is why that simple statement is ridiculous.

In its May 2026 fiscal statement, The Government estimated that the negative global factors will continue to undermine Australia’s terms of trade.

By 2027-28, they forecast a decline of 7.25 per cent in our terms of trade

Australia is forecast to return to its usual position of an external deficit of 4 per cent of GDP – a state that has been dominant since the 1970s.

That means that net income is leaving the nation to the rest of the world.

Remember for the level of economic activity to remain unchanged total expenditure must equal total output produced.

Expenditure is driven by income produced.

If some of the income produced by the economy is flowing out (via imports) and export revenue coming in is less than that flow, then there is an income drain from the economy.

At least one other source of expenditure (government, household consumption, and/or private investment) must fill that gap or total output will decline.

The following graph tells the story.

It shows the sectoral balance aggregates in Australia for the fiscal years 2000-01 to 2028-29, with the forward years using the Treasury projections published in ‘Budget Paper No.1’ which are the observations to the right of the thick black line.

Disregard the dotted lines for a moment.

The projections begin in 2026-27 and I have assumed that 2028-29 outcome will be equal to the 2027-28 Government estimate.

All the aggregates are expressed in terms of the balance as a percent of GDP.

I have modelled the fiscal deficit as a negative number even though it amounts to a positive injection to the economy.

You also get to see the mirror image relationship between it and the private balance more clearly this way.

It becomes clear, that with the current account deficit (green area) projected to return increasing deficits, which drain net spending from the domestic economy and with the fiscal balance moving towards zero over the same period, the private domestic balance (red line) will head quickly into higher deficits.

Higher private domestic deficits mean higher levels of indebtedness.

The Household sector is already carrying record levels of indebtedness which is why household consumption expenditure has been slowing down appreciably in the face of rising cost-of-living pressures.

You can see that the pandemic support from Government clearly allowed the private domestic sector to rebuild its saving buffers and reduce the precarity of its balance sheet (given the massive household debt).

In the earlier period, prior to the GFC, the credit binge in the private domestic sector was the only reason the government was able to record fiscal surpluses and still enjoy real GDP growth.

But the household sector, in particular, accumulated record levels of (unsustainable) debt (that household saving ratio went negative in this period even though historically it has been somewhere between 10 and 15 per cent of disposable income).

The fiscal stimulus in 2008-09 saw the fiscal balance go back to where it should be – in deficit – given the nation’s external deficit position.

This not only supported growth but also allowed the private domestic sector to start the process of rebalancing its precarious debt position.

You can see the red line moves into surplus or close to it.

That process was interrupted by the renewal of the fiscal surplus obsession in 2012-13.

The strong fiscal support during the pandemic overwhelmed all the nonsensical deficit scaremongering and allowed the private domestic sector to increase its overall saving (and pay down debt) which was a good thing.

But as the previous government withdrew its stimulus – and shifted towards and into fiscal surplus, the liquidity squeeze on the private domestic sector (because G < T) was temporarily staved off by the external surplus.

But once the external sector moved back into its usual deficit position, the squeeze on the private domestic sector intensified until the latest disruptions (Iran etc) saw some fiscal easing.

You can see that if the government’s austerity plans are realised and the fiscal position moves more close to balance (blue line) the private domestic deficit increases, which means that sector is going to be forced to accumulate more debt to maintain its spending.

With a global recession threatening and with higher interest rates the norm, the strategy outlined in the Government’s fiscal statement is once again placing the economy on an unsustainable path relying on household debt accumulation, which is a finite process.

Now think about what “the budget should be in surplus” would imply – that is indicated by the dotted lines.

For illustrative purposes, I assume the 0.5 per cent of GDP surplus this year (2025-26), repeated in 2026-27, then rising to 1 per cent in the years 2027-28, 2028-29, and 2029-30.

That is probably conservative relative to what these commentators are calling for.

If that was the case, and the external position was as forecast, then the private domestic sector would be forced into a higher deficit and higher indebtedness – an even more unsustainable position.

The other reality is that unemployment would be even higher if the government moved towards a balance.

The second cited article that came out over the weekend, claims:

So the logic runs that, by cutting the deficit, the government would be cutting demand in the economy, easing inflation, easing the debt burden and lowering interest rates too.

What’s not to like about this? If you’re the government, plenty. The hard implication is that the federal government can ease inflation by cutting spending. And the government, like all governments, loves spending. It’s why they fight so hard to win the treasury benches. To spend the treasure. And the people and industries which would lose funding or pay more tax would be guaranteed to scream.

This is an extraordinarily ignorant statement.

What’s not to like about this?

The recession which would destroy the prosperity of households who would become unemployed.

The children of the jobless households who inherit the disadvantage and take it into their adult lives.

The households who lose their houses because they can no longer pay the mortgage.

The public services that are compromised by the austerity.

The drop in productivity because the austerity harms infrastructure development and undermines the education sector.

Do I need to continue?

And as I indicated in my blog post last week – RBA governor makes another self-serving public presentation ignoring the dismal reality she is helping to create (July 30, 2026) – the idea that the current inflationary pressures are an excess demand outcome is the fiction the RBA is pushing but doesn’t reflect the underlying forces involved.

There is no justification for the recent interest rate hikes.

So trying to use that as a justification for imposing more austerity on a nation that has 10.9 per cent of its willing and available labour resources doing nothing amounts to criminal neglect.

Conclusion

It is really tough reading this stuff and realising that the commentators who are lucky enough to have the national platform really don’t know much about the way the system operates.

That is enough for today!

(c) Copyright 2026 William Mitchell. All Rights Reserved.