Modern Monetary Theory tells us that Government deficits only matter if there is excess demand in the economy, with Government spending buying goods and services that are in short supply and therefore pushing up prices (inflation).
Is there excess demand in the economy? With the increasing shift to part-time employment and the underemployment rate at around 12%, with Bank balances sheets not growing over the past two years (especially after ranging between 16% to 25% growth, which we thought was normal until 2007) and with commercial lending having negative growth, along with a few of the major world economies on austerity programs, I don't think there is excess demand.
The current rhetoric is that Government deficits, per se, are bad and surpluses are good. The Federal Government budget forecasts suggested that Australia would eliminate the deficit by a boom in the economy (ie Revenue is going up). In December 2008, annual Government revenue was $306 Billion and expenses were $293 Billion. In two years, expenses have increased 20.4% and revenue has decreased by 3.7%. This happended in the middle of the best export market and terms of trade we have ever had. That is $353 Billion in expenses and $295 Billion in revenue; a $58 Billion gap. Where is the demand?
The Australian Government is just not framing any media around the impending deficit "crisis", and by that I mean a self imposed crisis. The Government has committed to a surplus within two years (unnecessarily) and eventually will need to prepare the electorate for the belt tightening.
What we have heard about is the mining tax, the carbon tax and some snippets in the media about welfare spending cuts. If the revenue is not meeting budgets, then expenditure needs to be cut. A deficit of $58 billion with a Gross Domestic Product of around $1,300 Billion is over 4% of the economy. The Government needs to either tell the electorate that balancing the budget will be delayed, or begin their journey of fiscal austerity.
The US is currently maintaining their $1.3 Trillion plus annual deficit and their 10 year bond rate is 3.4%. Japan's debt is 200% of Gross Domestic Product and their 10 year bond rate is 1.25%, which has been there for 20 years. Why isn't the inflationary fear being expressed in the World's bond rates? Australia's 10 year bond rate recently peaked at 5.75%, but is now 5.45%.
The danger to you, as an investor, is when the Republicans in the US start getting their spending cuts implemented and when (if) the Australian Government starts making spending cuts.