The Australian government has a problem — the budget deficit is too small. How do I know that? Some 13.9% of available labour resources are idle, and the current output shortfall from recent trends is around 4% or $60 billion.

There is nothing intrinsically good or bad about any specific budget outcome. The outcome has to be related to the economic circumstances rather than to some pre-conceived notion that deficits are bad and surpluses are good. The government should aim to maximise the potential of all people.

There are glaring spending shortfalls I would remedy over the next several budgets. For example, I would fund more public hospital beds; increase the public education budget greatly (beyond Gonski’s recommendations); improve urban public transport; address the massive shortage in public housing while abolishing negative gearing to improve housing affordability; fast-track the very fast train project; and fund research and start-up in renewable energy to reduce our reliance on carbon over the next 10 years.

There is also massive waste and inequity in the current fiscal policy mix.

Many of these targets fit into what I call the blurring of the public-private boundaries under neo-liberalism, where profits are pocketed privately but losses are socialised as handouts. This system is deeply ingrained in Australia and should be remedied.

Over the next few budgets I would abolish anomalies such as federal funding to non-government schools ($8.3 billion); negative gearing ($5.2 billion); the private health insurance rebate ($4.5 billion); handouts to the mining sector ($2 billion); private hospital funding ($5 billion); general corporate welfare handouts ($9.8 billion) and eliminate the tax concessions for superannuants over 60, family trusts and the like. The mining tax should be redesigned to reflect its economic motivation as a resource rent tax with zero concessions and zero handouts to offset the impact.

One of the government’s primary goals should be to ensure that anyone who wants to work has a job and anyone who is unable to work has adequate income support. The number-one priority is not to balance the budget but to get nearly two million people back to working the hours they desire. The achievement of that goal is constrained only by real resource availability. The Australian government cannot run out of money. The government budget is not like a household budget. It issues the Australian dollar, which we use. It can purchase whatever is for sale in Australian dollars, including idle labour. Of course, that doesn’t mean the government should spend willy-nilly.

Inflation is the risk of excessive deficits, not insolvency, and Australia is a long way from that situation. Inflation is subdued and falling.

The government claims we are growing on trend and close to full employment. But even the OECD estimates the output gap to be around 2% at present ($30 billion). A closer examination would suggest the current departure from trend output growth is around $60 billion or 3.9%. The gap is widening as the economy slows under the strain of declining terms of trade, the overvalued dollar and fiscal austerity.

This large degree of slack is also mirrored in poor labour market performance. The ABS estimates there are 13.9% of available workers not working (670,000 unemployed, 869,000 underemployed and around 150,000 who want to work but are no longer actively seeking it due to lack of employment growth). Mass labour wastage of this magnitude arises because there is insufficient spending in the economy. Trying to pursue budget surpluses only makes the problem worse.

The preferred budget deficit for 2013-14 should be around $70 billion or 4.5% of GDP. This fiscal shift from an estimated deficit of around $20 billion in 2012-13, combined with a conservative estimate of the expenditure multiplier, would largely close the growth gap.

Here’s a graph I’ve compiled based on ABS data and my projections on the likely budget outcome for 2012-13, and my preferred budget outcome for 2013-14, if the government adopted my proposals:

Source: ABS Government Finance Statistics, Australia, 2011-12; ABS National Accounts, ABS Balance of Payments. The incremental output gap is defined as the percentage departure from trend growth (2000-2008) of 3.1% per annum.* Treasury estimate of external deficit in 2012-13. (a) My estimate. (b) Computed value implied from national accounting conventions. “Likely” denotes my estimation of the May 14 budget. “Preferred” denotes the figures if my proposals were enacted.

The data in the table shows that in the pre-crisis credit binge, the private sector was running constant and growing deficits, which fuelled the growth that allowed the government to achieve its surpluses. The consequence was the unsustainable rise in private debt levels.

The private sector has now reverted to more typical historical saving behaviour as it tries to reduce its debt levels, and private demand is not likely to drive strong growth in the coming years.

As the first step to restoring full employment, the national government should introduce an open-ended public employment program — a Job Guarantee — that offers a job at a living (minimum) wage to anyone who wants to work but cannot find employment.

That would cost around $22 billion per annum in the first instance and reduce the unemployment rate to 2% and create some 594,300 jobs (around 70,000 in the private sector). As private spending improved, the program would shrink significantly. It would also eliminate the unemployment benefit and several billion currently being spent on managing the unemployed (Job Services Australia!).

I appreciate that the argument here runs counter to the mainstream. In that vein, I have prepared a number of background briefing documents to help you understand the reasoning behind my short fantasy budget contribution. Please visit my blog and see the section fantasy budget.

*Crikey has invited the experts to play Wayne Swan for a day and submit their fantasy budgets, ahead of the real budget next Tuesday. Read Bernard Keane’s GST-boosting budget here, and John Quiggin’s effort. Think you can do better? Send us your fantasy budget, maximum of 200 words, and we’ll run some of the best — be sure to include your full name.