return to hot off the press list
Much has been written on this budget. I judged Terry McCrann’s article (below) the best. I add one or two points that seem to have attracted limited attention.
- It already seems clear that the budget has not had a favourable political effect. The “surplus” idea does not seem to have impressed the man in the street.
- If the budget figures were taken at face value, this is in Keynesian terms the most “contractionary” budget ever. The move from a large deficit to a miniscule surplus, if achieved, is equivalent to a withdrawal of 3 percentage points of GDP from the economy. Yet GDP is forecast to grow at a fractionally faster rate – from 3% to 3.25% in 2012-13. Swan has provided no explanation of his reversal of attitude or why there isn’t an adverse effect on economic growth (of course, he was wrong in arguing earlier that the large budgetary addition to demand in 2008-09 - about 4 percentage points - “saved” the economy).
- The forecast growth of 3.25% in 2012-13 allows for a fall of 0.5% in public final demand (cf an increase of 1.5% this year) but offset by an increase of 5% in private final demand (cf 6% this year). Imports are again forecast to grow faster than exports. Given the low levels of consumer and business confidence, and likely continued overseas problems, this forecast seems optimistic.
- The main (potential) contractionary instrument in 2012-13 is the supposed largest ever reduction in budget spending – on a cash basis a reduction in real terms of 4.3%, again the largest ever (the next largest real reduction of 3.1% was in 1998-99 under the Hawke Keating government). But the extent of the reduction is overstated as some spending that would have occurred in 2012-13 has been moved into the current year or moved/ deferred until later years (if at all). Defence (to fall slightly in 2012-13) and overseas aid are two examples.
- Even after these shifts in spending out of 2012-13, the overall level at 23.5% of GDP is still slightly higher than in either 2006-07 or 2007-08, which at 23.1% was the lowest post Whitlam. Unsurprisingly, the level of spending is projected to increase again in 2013-14 to 23.7% of GDP. Note that the rate of growth in real spending since 2007-08 is over 3% pa, above the Government’s promise to keep it, on average, at 2% pa.
- Total revenue is estimated to increase to 23.8% of GDP in 2012-13 from 22.3 % this year. This reflects increases in taxes (carbon – initial $4bn - and resource rent taxes - +$5.7bn) and transfers from the Future Fund and asset sales. Contrary to Labor’s promise, the burden of taxation will increase by over 1 percentage point of GDP (although it will be lower than in 2007-08). However, while the projections of tax revenues (relative to GDP) show an increase between 2012-13 and 2015-16, they suggest a percentage point lower level than in the period from 2000-01 to 2007-08 (but not in respect of earlier periods back to the mid 1980s).
More generally, while considerable scepticism is appropriate about Swan’s promise to budget over the next four years for a surplus and to limit real spending growth to 2% pa (on average), with the Coalition also promising surpluses it does mean that both major parties are heavily constrained in their use of the budget and that government spending should fall slightly (relative to the rest of the economy). However, the (cash) projections to 2015-16 still show a slight increase compared with 2007-08 in Labor’s spending levels (relative to GDP) and the Coalition has still to explain what its small government policy signifies. As I have suggested before, properly explained there is scope to reduce spending by 2 percentage points of GDP without scaring the horses – ie by $25-30 bn.
Des Moore
Budget 2012 steals with one hand, gives with the other
Article by Terry McCrann in the Herald Sun 8 May 2012
An unbelievable budget. Literally.
Herald Sun business commentator Terry McCrann explains the assumptions behind the budget projections.
AFTER four Budgets playing Father Christmas, this is Wayne Swan's Robin Hood Budget.
An unbelievable budget. Literally.
Now he's not only handing out money with one hand, he's also taking it back with the other.
The Budget has new spending that adds up to $22 billion over the five years, including this one. But it also takes back $34 billion over those years.
The $12 billion in net savings, over five years, is the rather modest measure of this Budget's "toughness".
The Treasurer could have reached his surplus by slashing much less - if he had not opted for new spending.
But the Robin Hood bit is precisely what this Budget is all about. And why it is an intensely political exercise.
Swan is taking from the well-off - like the superannuation hit to high-income earners and abandoning the company tax cut - so he can redirect money to lower-income families and the disadvantaged.
It's not only Robin Hood in the old-fashioned Labor way. But a desperate attempt to compensate, indeed over-compensate for the carbon tax.
There's also a new age edge to the Robin Hood flavour. Swan is stealing from the fiscal future, and indeed the past, to "give" to the present - this Budget's 2012-13 year - where he's hostage to the promise written in fiscal blood of a surplus.
Spending is shovelled into this current year which finishes at the end of June; and also into the 2013-14 year which starts in July next year. And spending is literally taken out of the all-important 2012-13 year.
Total spending increases by a very healthy 4.8 per cent in real terms in 2011-12; then will purportedly fall by 4.3 per cent in 2012-13; then spring back to a 3.7 per cent growth rate in 2013-14.
The actual dollar numbers are even more stark.
Spending goes up $25 billion this current year; falls $7 billion next year; and then leaps by $23 billion
Unbelievable.
Put that together with a similarly super-charged lift in revenue, surprisingly (not), in the 2012-13 year; and hey presto, Swan is playing Robin Hood AND Merlin - able to conjure a dramatic move from a $44 billion deficit this year to that $1.5 billion surplus next.
That forecast is very new age. It's a virtual reality surplus that exists only in the cyberspace of a Treasury computer. In the real world, it's a nonsense.
The one thing we can say with absolute certainty is the actual Budget bottom line in 2012-13 will not - repeat: will not - be a $1.5 billion surplus.
There's a tiny chance it will be a bigger surplus; the near certainty that it will end up in deficit like all the previous Swan Budgets.
Just look at the current year which is nearing an end. A year ago the forecast was for a $23 billion surplus; last night the figure was "adjusted" up to $44 billion. It's a racing certainty the final figure will be something different again. And the year's got only two months to go.
Swan's is half-right that the Budget will "make way" for the Reserve Bank to cut interest rates further.
And he's likely to be "rewarded" by another rate cut at the next RBA board meeting in early June.
But it's more the case that the Budget doesn't stand in the way. The RBA is cutting because the economy is not growing as fast as both it and Treasury believed last year.
The Budget-rate link actually works more the other way; that the Budget is hostage to what the RBA does with rates.
If it left rates too high for too long, growth in the economy would stay sluggish, and that alone would tip the Budget back into deficit.
In a more fundamental sense, the Budget - and the Australian economy - are hostage to what happens in China, Europe and the US.
In the wake of the elections in France and Greece, the chances of Europe tipping us into another GFC have increased. The US recovery is going to be sluggish at best. And China, in the words of Winston Churchill, is a riddle wrapped in an enigma.
It's economy has slowed. No-one really knows what might happen next.
The best thing to be said about Swan's fifth Budget in this context of uncertainty is that it hasn't really done anything major.
That is to say, it did no major harm. It didn't do much good, either. But it's a plus that it only pretended to slash and burn.
The two biggest cuts were abandoning the small cut in company tax. And the so-called "reprogramming" of defence spending, more normally known as pushing off spending to manana.
It managed to give Wayne Swan - and Julia Gillard - a surplus. But that surplus has got to survive the Budget update in December, and then the Budget next year. Good luck.