Slimmed down surplus as Swan unveils mid-year budget: experts respond

Treasurer Wayne Swan is maintaining a slimmed down surplus for 2012-2013 - but storm clouds are rolling over the global economy. AAP

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.

Mid-Year Economic and Fiscal Outlook