From Business Spectator via the AFR and The Oz comes the following news on the Budget this morning:
Federal Treasurer Wayne Swan has said that larger than expected spending cuts will be needed to preserve Labor’s promise of a budget surplus in 2012-13, thanks largely to a $7 billion drop in capital gains tax revenue caused by global market uncertainty, according to media reports.
The mid-year budget review to be released this week will be closely watched. Reports suggest the combination of falling revenue and unexpected spending on items such as flood and natural disaster reconstruction have combined to put significant pressure on the government’s ability to return to surplus next year.
…In May, the government forecast the 2012-13 fiscal year to deliver a $3.5 billion surplus. But that same forecast saw the deficit in 2011-12 to be $22.6 billion, when the mid-year budget review this week is expected to instead show a deficit of about $30 billion.
Jeez. Treasury really needs to get a handle on disleveraging. In May, Treasury missed last financial year’s forecasts by another $8 billion. Back then Delusional Economics had this to say:
The government seems to have done a fairly good job of predicting most of the macro economic influences on the budget. Exports, imports, inflation, ToT 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 underperform.
And so it comes to pass with another $8 billion hole, just six months later.
Anyways, Australian austerity going strong. An extra $7 billion in cuts for next year is another 0.5% or so of GDP up in smoke. As I’ve said before, there isn’t much choice given the now pressing need for a strong Budget to backstop the bank’s offshore liabilities.
But, given the slow growth that I expect next year, say 2.5%, these cuts are pretty nasty. Sectoral balances tell us that when government cuts spending like this, there are only two options to offset to the blow to GDP, either increased growth in the external sector or increased borrowing in the wider private sector.
We’ve certainly got the former but will the rate of growth increase to fill the austerity gap next year when the world is rapidly slowing? A diminishing growth rate seems more likely to me, although a falling dollar will help.
So, that leaves wider private sector borrowing. Either the RBA just ignores slower growth and rising unemployment (which it can’t) or it is forced to cuts rates further than it would otherwise. Which means Swanny’s real target is Joe Public. Can he deliver?
