The Federal Government is still aiming to deliver a slimmed down surplus next financial year, but has downgraded economic growth forecasts amid a slowing world economy and news that Europe may already be in recession.
Announcing the government’s mid year economic and fiscal outlook, Treasurer Wayne Swan said the 2012-2013 surplus would be $1.5 billion, down from $3.5 billion. This financial year’s deficit forecast has blown out to $37 billion, up from $22.6 billion.
To deliver the surplus, the government has unveiled a number of saving measures, increasing the public sector efficiency dividend by 2.5%, which could lead to up to 6000 public sector jobs. The Baby Bonus will also be cut, and funding to the higher education sector has been deferred.
Swan said Australia’s real GDP growth was now expected to be 3.25% in the current financial year, down 0.75% from initial budget projections in May. It is projected to be 3.25% in 2012-2013, down 0.5% from projections.
The cuts follows the release of the Organisation for Economic Co-operation and Development’s (OECD) twice-yearly global growth report cutting global growth forecasts and calling for European policy makers to deal effectively with its sovereign debt crisis.
Here’s what our leading academic experts make of it:
John Vaz, Course Director-Master of Applied Finance, Department of Accounting and Finance, Monash University
Let’s look at what is being proposed and the potential downsides from actions to “guarantee” a stimulus. As an old friend of mine in funds management used to say: if you want a guarantee, buy a washing machine.
Labor is acting like a bullied child with the insecurity to match. The austerity measures delivered by Treasurer Wayne Swan reek of political and personal interest – not national interest.
Fundamentally, Labor is dancing from the tune of the Opposition and the innate insecurity of Labor governments who want to be seen as good economic managers.
The record will show that in fact Labor governments (since Whitlam) have a good record of economic management and in fact have implemented major structural reforms – not to mention retirement savings reforms to prevent future fiscal problems. Put it in perspective, the forecast surplus is 0.1% of GDP.
The case to achieve a surplus in a pure economic sense cannot be made as the consequences of actions necessary to achieving a surplus are far more negative. The government cites a poor global position as the reason for taking this action when it is fact politically motivated.
If the global position weakens and China slows, thus impacting our economy, then the government may well be forced to execute a stimulus in a similar rush (to the last time when billions of dollars were wasted in short term quick projects) that will result in waste all over again. In fact, it could lead to a worsening of the budget position.
The proposed cuts, if they seek to make the public service more efficient, can be supported. If they seek to reduce unnecessary middle class welfare for those who dont need it, then that is also a good thing. But what cannot be supported is cuts to services that reduce employment particularly when services are relied upon in the economy more broadly.
The Opposition is doing its usual lathering about cutting the public service – a good no-brainer strategy that has bad no-brainer consequences. The Opposition will say the government is too soft and not cutting the public service enough.
Savings of $11.5 billion are proposed over four years will by and large come from taking money out of the economy that was put in to stimulate it.
Taking a cut to expenditure will create more uncertainty and mixed messages about the economy. How credible is it to say we can achieve a surplus of 0.1% while we are headed into potentially dangerous territory due to global economic conditions?
If things worsen globally (which the government says it is concerned about) then the government’s fiscal position will worsen. Having already made cuts, will need to think about stimulus.
The government’s own forecasts are contradictory to the reasons they have put forward for the cuts. “The weak and fragile economic position of the major advanced economies presents considerable risks to the domestic economic outlook.”
Yet they say we will have close to trend growth (in spite of the global ecnonomic concerns) and yet they are putting in place cuts that may weaken this. Are we over-reacting? The government’s own chart (below) shows how relatively better we are positioned in debt terms and why we need to maintain the economy at its current level of activity, rather than chase this surplus carrot set up by the opposition and reflect the governments political insecurity rather than pure economic motives.
Just ask any retailer about the two speed economy if they think the economy needs to have spending cuts applied.
Sinclair Davidson, Professor of Institutional Economics at RMIT
While the government has cut expected tax revenue and also made some cuts to middle class welfare, I’m not convinced they have done enough to ensure a budget surplus in 2012-13.
Right now there is a wafer-thin projected surplus of $1.5 billion. I suspect come May next year the government will have to cut more spending. To be fair, they don’t have to announce all they have in mind right now, but we can be sure that they will be having to look for more savings in the coming months.
I suspect we will see a lot more cutting in the May budget next year. The Baby Bonus has been cut by $400 per baby, down to $5000 and also indexation will stop. Right now the indexation stops at three years, but I suspect that indexation will remain stopped. Bear in mind the government brought in a different scheme for paid maternity leave, so there is probably more room for cutting there.
What I found interesting is the 4% efficiency bonus on public servants (by increasing the efficiency dividend by 2.5%) which means 5000 - 6000 public service jobs will be cut. I suspect this is above the natural attrition rate, so they are talking about shrinking the public service. It remains to be seen where these cuts are going to occur; I think that’s quite a big change. Whether they have the stomach to pull it off, I don’t know.
Some of the funding promised to universities has been delayed into the future. They are going to keep the rewards for enrolling economics students, but everything else has been deferred into the future. That might cause a bit of pain in the university sector as everybody is already facing tough budgets next year.
I think the government has the right attitude; I don’t know whether they will actually deliver a surplus. We have to give Wayne Swan the credit for not giving into the temptation to put returning to surplus off for another year.
Mike Rafferty, senior research analyst, Workplace Research Centre, University of Sydney
Most economists know that a budget surplus or deficit for any one year is an accounting residual of no real economic importance. But as these things go, in order to prove his and Labor’s economic credentials Wayne Swan has elevated the achievement of a Budget surplus into a political campaign, and a major test of Labor’s economic management.
The trimmed down global growth forecasts mean revenues from income and corporate taxes will be down, and expenditure on things like unemployment benefits will go up. That makes the surplus target tougher to achieve.
The mid-year review has a few revenue measures, addressing tax concessions, and expenditure measures, addressing benefit levels and tests. It also signals some cuts in future public sector numbers, which raises issues about the government’s capacity to deliver services.
Appropriately enough, however, the mid-year review does most of its work by playing with the budgetary accounting conventions that produce the net position.
How is this done? Well the review brings some revenues into the current year making this year’s deficit bigger. It also pushes some expenditure back or forward a year. Net result is the very small surplus forecast of $1.5 billion for 2012/2013.
Should we be concerned at what looks like tricky behaviour to achieve next year’s surplus?
If the fiscal residual was meaningful, perhaps we could support the Opposition’s expected indignation at Labor’s creative accounting. But it simply isn’t that important, except that both parties have elevated it to such political prominence. Elevated or sunk to new levels of political populism?
The biggest problem is both political parties know that one year’s surplus or deficit is not a very good ways of assessing economic management. But both have dug such big holes in honour of the budget surplus that even the idea of stopping digging bigger ones is hard to accept.
If you want to know what the political parties really think about the Budget and this mid-year review, look for the politicians without the shovels.
George Aryrous, Senior Lecturer, School of Social Sciences and International Studies, University of New South Wales:
It is a political mini budget but with economic consequences, and that is the problem.
It is this obsession with a budget surplus at any cost despite the cycle of the economic situation that is the political element. It seems to be a measure of political credibility but pursuing that and depending on how it is achieved, can have dramatic economic consequences.
I would agree with the position [that we should be expanding the economy at this point]. Given the success the government had with that approach just before the global financial crisis I am surprised they are not thinking along the same lines now.
They had the foresight and the strength of political character back then to not pursue a surplus and to spend ahead of the downturn to prevent it happening and it was a success and I would have thought they would have learned the lesson and perhaps pursued the same strategy this time around.
There is always scope at any point in the economic cycle for intelligent budget policies that remove distortionary taxes or subsidies to people who don’t really need them (like the Baby Bonus) but ideally that would be to re-direct that revenue, especially at a critical point such as now when we are looking toward a downturn, into spending that will keep the economy afloat rather than just seeing it as a net saving.
[The surplus] is meaningless because some of the judgements are so arbitrary, the timestamp that is put on different forms of spending and revenue income, things that fall before or just after June 30. It is pretty arbitrary so the fact that is $1.3 billion surplus or deficit doesn’t really matter, it is the general thrust of overall fiscal policy that is important.
And if the general thrust is towards more austerity and contraction at this time of the economic cycle then I think that is bad medicine.
Associate Professor Steve Keen, School of Economics and Finance, University of Western Sydney
It’s madness to be talking about cutting the deficit right now when the only thing that got us through the crisis the first time around was the huge deficit spending that Rudd did. That was worth about a $40 billion stimulus, or close to 4% of GDP, plus the first home lenders boost, as I call it, which was a really bad idea but it actually injected $100 billion of additional borrowed money into the economy. And then, finally, China kicked in - its stimulus package meant that they got an enormous boost in their demand for our imports. It was all those three things together that got us through.
Now those things are gone. Thank God the home owners scheme is gone, and the housing bubble is going into reverse. The government’s stimulus has ended, and going from deficit to surplus is going to be a negative impact and China’s stimulus seems to have petered out and we’re now getting negative manufacturing figures from China.
So all those things mean there are negatives coming our way and the government’s intention to return to surplus is simply impossible in the current circumstances. It’s insane. With the economy petering out they are still living in this mythical world where cuts to government spending actually stimulate the economy – and that’s sheer nonsense. They’ll be forced by circumstances to go back to deficit again. It points out how inane the political conversation is in Canberra when they’re focusing on getting back to surplus as if the economy’s booming, when it’s not.
It’s neoclassical economics; the same people who didn’t see the crisis coming dominate the Treasury, they dominate the Reserve Bank of Australia, they dominate the political advisors to the both main parties and they simply don’t know what caused the crisis.
They think it was what’s called an exogenous shock; they think the shock is over and therefore it’s time to go back to surplus again. They have absolutely no understanding of what caused the crisis in the first place.
If they cut the spending out now, rather than having one part of society - the private sector - reducing its debt levels, they’ll have two sectors doing it and we’ll go into a deeper funk. That’s simply the wrong policy right now.