Back in April last year, when the national budget was fresh to the presses, I made a few comments about what I perceived at the time was a misunderstanding by Treasury boffins as to what exactly was happenning in the Australian economy:
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.
Throughout the year at MacroBusiness we have re-emphasised that there was something going wrong with the modelling at the Treasury because they appeared to have over estimated the fiscal on-flow from the mining boom, as well as ignoring the deflationary forces at work in the rest of the economy. This from H&H in late November:
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 I guess it is of little surprise today that we once agian see Wayne Swan fronting the media to explain that his plans for the Australian economy have not lived up to expectations, again:
Much weaker than expected company tax collections have forced the government to embark on a new round of budget cuts, prompting the Treasurer, Wayne Swan, to declare this year’s budget will be “in some ways the hardest of them all”.
The warning came as the Treasury boss, Martin Parkinson, told a business audience tax collections had fallen 4 percentage points since the global financial crisis and were not expected to recover “for many years to come”.
“Indeed, for both levels of government surpluses are likely to remain at best razor-thin without deliberate efforts,” he told the Australia-Israel Chamber of Commerce in Sydney yesterday.
Mining companies were paying much less tax than expected, providing one-fifth of all company profits but paying just one-tenth of all company tax, primarily because of depreciation deductions flowing from the investment boom.
Mr Swan committed himself to announce a budget surplus on budget night no matter how weak the revenue, saying a surplus would send a “very clear message to the world that Australia is in good nick”.
Yesterday’s national accounts showed company tax revenue up 4.5 per cent over the first six months of the financial year. The May budget had forecast an increase of 29 per cent over the entire year, revised down in November to an increase of 21 per cent.
Mr Swan said company tax collections were increasing, but “not consistent with where we expected them to be increasing to”.
The government’s expenditure review committee, unofficially known as the razor gang, has already started looking for cuts. One unknown is the extent of the damage on the economy caused by the floods. Parts of NSW and Victoria are still under water.
Mr Parkinson said capital gains tax collections had been “hit hard” following the financial crisis. GST collections were suffering from more cautious household spending, and non-mining tax collections were suffering at the hands of the high dollar.