Budget paralysis

Wayne Swan’s budget handed down his budget last night. His speech began with:

Mr Speaker, the purpose of this Labor Government, and this Labor Budget, is to put the opportunities that flow from a strong economy within reach of more Australians. To get more people into work, and to train them for more rewarding jobs. So that national prosperity reaches more lives, in more corners, of our patchwork economy.

To take full advantage of the seismic shift in global economic power, which positions us as a prime beneficiary of tremendous economic growth in our Asian region. And to succeed in the good times as we did in the bad – by choice, not by chance – by applying the best combination of hard work, responsible budgeting, and well-considered policies to the difficult challenges ahead.

Mr Speaker, this Budget is built on our firmest convictions: That just as our focus on jobs helped Australia beat the global recession, so too can a focus on jobs ensure we maximise our advantages in the Asian Century. And just as deficits are the right thing to fight a global recession, or to rebuild from natural disasters, so too are surpluses right for an economy set to grow strongly again.

We have imposed the strictest spending limits, delivering $22 billion in savings to make room for our key priorities, ensuring our country lives within its means.

In the case of challenges he stated:

Mr Speaker, 2011 has been a difficult year for many Australians who have endured floods and cyclones. We have made the necessary decisions to rebuild their communities, including a modest temporary levy.

Despite the total cost to Government of over $8 billion, our commitment to tightening our belt has not diminished one bit. We’ll be back in the black by 2012-13, on time, as promised.

The alternative – meandering back to surplus – would compound the pressures in our economy and push up the cost of living for pensioners and working people. We will reach surplus despite company taxes not recovering like our economy.

Losses built up during the global crisis are larger and lingering longer, contributing to reduced company taxes of $8 billion in this Budget over two years.This overhang from the GFC, along with a higher dollar and record mining investment and associated tax deductions, are all slowing revenue growth.

Since the last update, tax receipts are down $16 billion in the first two years, taking the whole write-down since the crisis to $130 billion over five years.The lower tax receipts in this Budget account for all the increase in the deficit for 2010-11 and about two-thirds of the increase over 2010-11 and 2011-12.

It means the deficit for 2011-12 becomes $22.6 billion, and net debt will now peak at 7.2 per cent of GDP that year, a tiny fraction of comparable countries. Our spending restraint means real growth in spending averages 1 per cent a year over the budget estimates, the lowest average rate in a five-year period since the 1980s.

This is putting us on track for a $3.5 billion surplus in 2012-13.

He also made it very clear that the economy was not sharing out wealth evenly:

Yet our patchwork economy grows unevenly across the nation.

Natural disasters have devastated families, cities and towns. The high dollar hurts our tourism and many manufacturing industries, especially small businesses.

For some, talk of an investment boom seems divorced from reality. Wages are growing, yet many live paycheque to paycheque. Not every region prospers. Not every health service is as good as it can be, especially for the mentally ill.

Unemployment has a four in front of it, yet some households have never had a breadwinner. The economy cries out for workers, yet too many are left behind, unwilling or unskilled – and untouched by the dignity of work.

Mr Speaker, that’s why the core of this Labor Budget is: a plan to build the more productive workforce our economy needs, including a $3 billion training package, new ways to get people into work, and critical new investments in economic infrastructure; a plan for better schools, hospitals, and health care, including a total of $2.2 billion for mental health services and $1.8 billion for regional health facilities; and cost of living relief for families, investments in a sustainable Australia, and new assistance for small businesses and manufacturers.

And finally the outlook:

Real GDP growth is forecast to be a strong 4 per cent in 2011-12 and 3-3/4 per cent in 2012-13.

Over 300,000 jobs have been created in the past year and the unemployment rate is forecast to fall further, to 4 1/2 per cent by mid 2013, creating another half a million jobs. Mining investment will rise to around 8 times the level preceding the boom to $76 billion in 2011-12, underpinned by the highest sustained terms of trade in 140 years.

But not every family or business is feeling the immediate benefits.The dollar is around post-float highs and this makes it difficult for some sectors, particularly those that compete in international markets. We see lingering effects from the global recession in consumer caution, a slow improvement in people’s wealth, and tighter credit, all of which has an impact on government revenue.

But with the investment pipeline ramping up and unemployment falling, the boom will test our economy and our workforce, and price pressures will re-emerge. That’s why we have strict spending limits – so that we don’t compound these pressures – and why this Budget will help get more Australians into better jobs, improving productivity and participation.

The economic forecasts given in the budget are as follows:

  • $49.4b deficit in 2010-11
  • $22.6b deficit in 2011-12
  • $3.5b surplus in 2012-13

Using GDP forecasts as follows:

  • 2010-2011 2.25%
  • 2011-12 4%
  • 2012-13 3.75%
  • 2013-2014 3%
  • 2014-2015 3%

With a claimed loss to GDP this year of 0.5% from local disasters, and 0.75% if international disasters are included.

The spending cuts announced were as follows:

  • $2 billion by pausing indexation of family tax benefit
  • $1.1 billion from public service
  • $954m in fringe benefit tax changes for cars
  • $755m in changes to spouse tax offset
  • $740m in changes to trust income
  • $480m halving hecs break offset for upfront payments
  • $1.3b in defence spending cuts
  • $1.2b in defence efficiency
  • $945m in infrastructure savings by postponing some projects
  • $434m Green car fund end
  • $640m carbon capture and storage program end

With some of the additional spending being:

Welfare to work

  • Single parents can earn extra $3900 before losing benefit
  • Disability pension reciepents under 35 face tougher work tests
  • Long term jobless must do more work for the dole

Other welfare

  • Family Tax Benefit A for families with older teenagers ($772 million)
  • Bringing forward of the Low Income Tax Offset for low income earners ($1.25 million).
  • Pensioners delivered free TV set top boxes, the ability to earn $125 a week extra without threatening the pension, and extra money for World War II and Korean prisoners of war.

Regional Australia

  • $4.3 billion for regional hospitals universities and roads
  • $29 million of strategic planning
  • 16,000 regional migration scheme

Mental health

  • $2.2b over 5 years
  • $1.5b in new money
  • $443m to tackle suicide
  • $571m for one contact point service
  • $492m early intervention
  • $220m primary health care
  • New national commission, headspace sites , partnership with states

Small Business

  • Immediate write off of assets under $5000
  • $5000 off of a purchase of vehicle

Education

  • $450m school teacher bonus
  • $222m school chaplains

Overall Analysis:

When I first analysed the budget I concluded the following:

The government seems to have done a fairly good job of predicting most of the macro economic influences on the budget. Exports, imports, inflation, Terms of Trade and employment are all in-line with predictions. However, they have stumbled significantly with private debt dynamics. They certainly did not predict the very large influence that a change in private sector credit issuance and associated spending patterns would have on the budget. Although members of MacroBusiness has been warning about this for some time I am not really surprised by the failure of the government to notice the issue. This is the same thing that side-swiped many other comparable economies over the last few years. Dr Bernanke has been made famous by his complete disregard for private sector debt dynamics while the US economy imploded around him.

From Mr Swan’s speech today, I detect that he doesn’t quite understand what the problem is, and I see little evidence that the government is about to launch into another stimulus program to kick start credit. In fact, the reverse is clearly true. As I said in my analysis of Forecast 6, this lack of new stimulus will have significant flow-on effects to downstream economic participants.

So long as the government’s ignorance of the effects of disleveraging continue, they will be at risk of severe embarrassment as the economy continues to under perform.

My analysis points to a national bind that affects fiscal policy as much as it does monetary policy. Both government and the RBA are trying to steer a course through a large economic adjustment. On the one hand, they aim to make room for increased mining activity. On the other hand, because of our huge household debt and housing bubble, they face the constant risk of overdoing the effort to make room and stalling the services economy. I was obviously, therefore, looking for something in the budget speech to offset this concern. The only thing I could find was the micro-economic measures aiming to boost employment participation.

I don’t want to talk down initiatives in mental health and regional infrastructure, but from the outset Wayne Swan stated that this budget was meant to share the wealth of the nation to “all postcodes”. There is very little in this budget that addresses that single point and the imbalances caused by the large capital investment and profits of the mining sector seem set to continue to apply pressure to the broader economy. At a time when the rest of the economy is holding such large private sector debt I feel the Treasurer is underestimating the economic ramifications of not addressing this point.

The government expects the deficit for the current financial year to reach $49.4 billion, or 3.6 per cent of gross domestic product (GDP), up from $41.5 billion forecast in November’s mid-year outlook. Yet they claim that even though tax revenue continues to fall, the economy  is going to turn around a $3.5billion dollar surplus in just 2 years. Obviously this is a continuation of the “China play” while leaning even more heavily on the Terms of Trade which, even by the Treasurer’s own admission, is distorting the economy and the non-mining sector is suffering.

For most economists who so easily ignore Godzilla I suspect this budget will be seen as boring and will have little effect on there overall prognosis for future monetary policy from the RBA. However it must be noted the RBA has already been stalling on interest rates due to the slow down in retail and housing (the reknowned conservative consumer). Although these taxation changes seem small, and are targeted largely at higher income brackets, the loss of $30-$50 dollars per week in non-indexed family tax benefits, changes to family trusts rules, fringe benefits on cars or other taxation has the potential to be equivalent to a 25bps rate rise for many families. The offsets for lower income earners are tiny.

As noted by JP Morgan and Fujitsu in their latest report, households are delicately poised at current interest rates. There maybe a boom coming, but it isn’t something that is going to be immediate for most of the economy. Further austerity for the household sector and continuing to ignore disleveraging is an economic oversight that poses a large risk to the Treasurer’s forecasts.

Like the RBA, the Budget looks caught between the failing debt dynamics of Australia’s old growth model and the one-sided investment of the new growth model. Maybe doing nothing at all was the best possible outcome.

Comments

  1. Great wrap up. Thanks.

    Just 1 thing, can somebody explain how / where the $22B of savings Swanny mentioned are. Adding up the listed savings comes to $10.5B, wheres the extra $11.5B income coming from for 2011/2012?

  2. Thanks for the summary , did not have to trawl through a lots of news and self-serving op-eds

  3. Really hope this Budget eventuates, contrary to a few things stated, Australia didn’t beat the GFC it looks like its’ starting to surface here, unemployment/under-employment is high.

    Not many people have a high salary either. Tonnes of people are living pay cheque to pay cheque.

    Mr. Treasurer, the Economy ain’t going that good for many people, and superb for a very few. “Two Speed Economy” sounds like something that would come out of Gobbels’ mouth.

  4. Great summary and concise analysis DE – 100x better than MSM BS.

    Will forward this to all and sundry.

    For mind, it was a feather weight budget, not tough at all.
    No real reform, and just patchwork measures to fix larger macroeconomic problems.

    I also question the GDP growth and taxation revenue forecasts – I think they will be shocked on the downside in the coming years – even if China doesn’t slow down or if house prices settle.

    When so much revenue and GDP is reliant upon transactions – i.e shuffling money around instead of investing it – it leaves the whole economy open to exogenous and endogenous shocks.

    Another natural disaster or two could spill everything over into permanent deficits.

  5. I must concur – great analysis DE!

    We should invite the presstitutes from MSM to read these blogs and possibly become more enlightened.

    I too have sent this link out to the multitudes.

  6. Great job DE.

    I concur with The Prince’s thoughts on upcoming surprises for the government when tax revenues comein on the low side, and that the budget was definitey not tough by any means (not that it should necessarily be so).

    • The funny thing is, it shouldn’t be a surprise – the 24% increase in bottom line revenue within 12 months is a joke.

      Unless they install a $21-40K FHBG or start pumping out cheap RMBS to forestall the housing slump (i.e get transactions up), GST revenue cannot go up more than 1-3% at best, whilst CGT and stamp duty will still go down.

      So its a complete reliance upon mining tax revenue – whilst commodity prices are at the highest level ever, and more and more supply is coming on line (medium term) and the AUD appreciates.

      If there’s a commodity price correction (remember all the major miners now get paid in SPOT prices, not contracts) or the USD rallies – i.e end of QE2 and no QE3 – then I can’t see how any of this will be a “surprise”.

      They need to check the water at Treasury – I think there’s pixies peeing in it or something.

      • Alex Heyworth

        As well as mining tax revenue relying on commodity prices holding up, there is the effect of the huge capital spending by the big miners, which will greatly reduce their tax liabilities.

  7. DE I was wondering what your thoughts are on the effect on the sectorial balances you mentioned recently.

    It seems that they are looking for a fiscal contraction of 2% of GDP at a time when consumers are saving 10% of income and refusing to gear up. Outside of a large boost in the trade surplus it looks like Swan is going to drive us into a recession.

    Steve

  8. Kick the can down the road and let some future gov’t deal with all the imbalances and middle class welfare. More of the same from Australia’s 2nd worse Treasurer (beaten by Howard)

  9. Alex Heyworth

    That’s a big call, there’s a lot of competition. Remember Jim Cairns? John Kerin?

  10. Thanks DE Great summary

    I really love the way politicos and economists use words to distort meaning these days.
    Government Tax increases are now called government “savings” GABM!!!!!

  11. I tried to find some information in the detailed budget papers on how the revenue figures are derived. I have a couple of observations on statement 5

    Page 18 notes that GST revenue has been revised upward by 2.5bn “primarily reflecting strong consumer spending and the improved outlook for growth in consumption subject to GST”.

    Page 17 notes that CGT revenue is now estimated to be 2.2bn higher due to “continued improvement in asset prices”

    Neither of these are consistent with my understanding but Page 21 has the craziest statement that “In 2011-12, Company taxation revenue growth is expected to remain strong, with an increase of 11.5bn (17.3%) from the 2010-11 level, as the utilisation of prior-year losses declines and company profits grow in line with the broader economy.”

    They must use some crazy commodity prices in their assumptions – does anyone know where I can find these assumptions on how they get company tax numbers?

  12. Thanks DE ,nice round up…I think they
    are pulling on the future,not able enough pushing the present …cheers JR

    • MSM – mainstream media. Fish and chip wrapping. Property magazines with a “news” insert (e.g Courier/Sunday Mail)

      ACA, Today/Tonight etc ad nauseam. Them.