Generally, you can rely on the mix of economics and the media creating a worrying headline about something like the Federal Budget’s bottom line. Today’s headline, however, from the SMH is generally a positive one, though we’re told there are two terrible reasons for the good news!

On the positive front, Treasurer Dr Jim Chalmers looks like he has presided over a budget surplus of $22 billion and we haven’t had one of those since Peter Costello conjured one up in 2007! The SMH’s Rachel Clun tells us that “…there have been 14 budget deficits, worth a combined $612.7 billion,” since that time and it coincided with the arrival of the first iPhone.

A budget surplus is good for reducing the country’s public debt and it’s a good conveyance for foreign banks lending us money, which is also good news. But when the Treasurer is rolling in dough, it generally comes from us!

Interestingly, economist Chris Richardson points out that this $22 billion is the ill-begotten gains from inflation and the war in Ukraine, and because inflation still remains high at 6% on an annual basis. If we look at the monthly measure, it’s down to 4.9%, but it’s still high so that means Canberra gets more taxes from the higher prices of goods and services, which drives profits up. The government is also gaining from the Ukraine war as it drives up oil prices, which has helped Treasury’s revenue because higher oil prices add to tax collections from oil companies, who then slug us at the bowzer, which, in turn, helps Dr Jim’s tax collections.

Meanwhile, the iron ore price has remained higher than Dr Jim used in his Budget calculations, which is a trick that has worked for a number of years, as China kept buying iron ore from BHP, Rio Tinto and Fortescue, along with that ‘despised stuff’ from the likes of Whitehaven Coal!

Probably a third horrible thing that most climate activists would hate about this $22 billion surplus windfall is the fact that as some countries over-commit to renewables, the likes of China, India and the USA are still buying coal big time because they don’t think their populations will accept blackouts and energy prices going through the roof.

Away from these windfall gains from inflation and war, Chris Richardson has taken the gloss off Dr Jim’s budgeting. “Richardson said Labor’s election decisions had increased spending by $61 billion across the four years to 2025-26 and increased taxes by $27 billion over the same period, which overall worsened the budget bottom line to the tune of $34 billion,” Clun reports.

And what about the future? The current health of the global economy could help a predicted deficit of $13.9 billion for the 2023/24 Budget into another surplus.

How does this ‘magical’ budget turnaround happen? Here’s Clun again: “When Chalmers delivered the 2023-24 budget in May, it assumed the price of iron ore would fall from $US117 a tonne to an estimated $US60 a tonne in March next year. This week, iron ore was still above $US120 a tonne.”

So, the world economy, and especially China, is going to be important for the budget’s bottom line going forward, along with what central bankers do with interest rates. Right now, stock markets are spooked that the Fed might raise rates in November because the US economy looks stronger than expected.

This economic strength worries the Federal Reserve about inflation also remaining higher for longer, so it could decide to use another rate hike to beat prices down further, but that could turn a US soft landing into a harder landing recession.

This is happening as China struggles with a slower-than-expected economy, which wouldn’t be helped if the world’s biggest economy ends up in recession because of too many rate rises. A recession will not only help KO inflation but will force iron, coal and oil prices down and our Budget would go back into deficit!

Economics is not only a dismal science, it’s a zero sum game.

In a perfect world, central banks would gamble that they’ve done enough to lower inflation with their number of rate rises (which I think is the case), but central bankers are neither good nor courageous gamblers. As a consequence, they have a history of over-loosening and over-tightening.