Careful of the fiscal drag, Tony

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It is quite something to watch how far out of step Australia’s political Budget narrative is with the reality of the current and future role of government spending in the economy.

The Opposition’s constant attacks, along with the loon pond agenda loose in the MSM business press, has everyone thinking that this Budget is a massive blowout in terms of spending.

While it’s true that the Budget has missed its revenue forecasts dramatically and it remains in deficit, it is still contractionary (that is, spending less than last year). A note today from Goldman Sachs makes this point very clearly:

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This is a Budget which seeks to do no harm in the short term – delivering a fiscal drag of just 0.2% of GDP -and social and economic good over the longer term crafted around 2 signature policies of education and disability funding. Nevertheless, the Budget brought with it savage reductions in revenue projections despite relatively optimistic assumptions on commodity prices and nominal economic growth. More realistic assumptions could reveal a revenue shortfall closer to $150 bn over the period to 2015-16.

A very unusual election year Budget
This Budget will likely be remembered as a very rare event. It is a budget delivered in an election year virtually devoid of political largess and built solely around 2 signature polices in education and disability funding targeting the long run. However, the 2013-14 Budget is distinguishable since it promises 2 further years of fiscal contraction at a time when non-mining economic growth remains tepid and when a Federal election looms on September 14.

I will add that as we head over the mining investment cliff in the year ahead, the last thing we need to do is increase the fiscal drag on growth.

Tony Abbott will tonight deliver his Budget tomorrow night. His Treasurer has been egging on the narrative that the Government hasn’t been tough enough. And Abbott himself was talking tough this morning on the ABC:

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But the problem is that if Tony commits to any deeper cuts tonight, he’ll be painting himself into a corner just when the economy will need fiscal flexibility.

Tonight is good night for Tony to disappoint the loon pond.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.