The 2011-12 Budget: making insufficient room for the expected boom?

Fiscal Policy Overview:  The 2011-12 Budget in a nutshell

As the global financial crisis loomed a few years ago, Ken Henry, the recently retired Treasury Secretary, is reported to have given the Government some pithy budget policy advice:

Go hard, go early, go households.

What counterpart advice would justify the 2011-12 Budget as tabled, including its very heavy reliance on assumed overseas economic boom conditions to get the Budget ‘back in black’ in 2012-13? 

With apologies to Ken Henry, the 2011-12 Budget could only be justified by the following injunction:

Go soft, go late, go automatic stabilisers.

Unfortunately, accepting that advice increases the risk of two, maybe three, nasty consequences:

Go inflation, go interest rates, and, maybe, go the $A.

I hope I’m wrong.  But early action by the Reserve Bank to raise interest rates might suggest otherwise.

Alternative economic scenarios

One final thought.  The Budget papers highlight significant ‘downside risks’ to forecast economic conditions (e.g., including concern about European debt).  This implies that the official forecasts might have been pitched towards the upper end of a plausible range of possibilities. If so, it might mean that there’s a better-than-even chance economic conditions will be weaker than officially forecast.

On balance, that would not be a good thing.  The fragile ‘back in black’ surplus would suffer a bad case of the Budget deficit blues.  The $A might turn down as the terms of trade weakened more than forecast.

This combination of events could even return Australia, and much of the Western world, to the nasty conjuncture experienced in the 1970s.  That is the combination of lower growth, weakening employment and high inflation, or, in the ugly jargon of the time:  stagflation.

I really hope I’m wrong on that destructive scenario.