Jeez, I don’t know why we can’t just say it. But the new Economic Statement is effectively a passive stimulus document that allows greater deficits than planned as growth slides and that feeds back into government revenue.
Here is the new underlying balance table:
There are effectively $12-13 billion in higher deficits for 2013/14 and 14/15. And around an extra $4 billion in 15/16.
This has produced and relies upon the following changed forecasts:
That is:
- growth cut to 2.5% for 2013/14 from 2.75%, 3% thereafter
- unemployment increased from 5.75% to 6.25% in 2013/14 and 14/15
- terms of trade falls to increase from .75% in 2013/14 to 5.75% and from 1.75% to 3.75% the year after, plus some little extra falls in the two years after that
- there have also been big write downs in projected business investment from 4.5% growth to 1.5% growth 2013/14 and in 2014/15 from 1% to -.05%
- government contributions to growth have lifted from zero to .75% of GDP in 2013/14 and 0.5% to 1% of GDP in 2015/16
- but nominal growth has still been chopped, from 5% to 3.75% in 2013/14 and from 5% to 4.5% in 2014.15
- there is also a cut in the assumed dollar price to 92 cents from $103
- the iron ore forecasts are also much lower:
So, does any of make any sense?
Yes, letting the budget blow out makes a lot of sense, I continue to doubt we’ll get anywhere surplus in the forecast period but that is not a problem today.
My own view is that the terms of trade will fall further than the projections but they are not unreasonable now. Probably the most delusional figures are the business investment projections which will, I suspect, be much weaker given they show little effect of the mining investment cliff. Growth will be lower as a result and thus you can expect further downgrades in the future.
I would rather see more new spending on infrastructure but the Government has at least rightly moved to a counter-cyclical position of contributing demand to the economy for the next two years.
The headlines will all be about bigger deficits as usual but this is a more sensible document than we’ve seen in several years from Treasury and the real story is the lifting of the fiscal drag. We do finally have a Government taking our deteriorating position seriously.
2013 Economic Statement by David Smith
