The drought is set to knock more than 20 per cent off Australian farm output cutting Australia’s forecast rate of economic growth by about one third.
Unveiling his half-yearly update on the Budget forecasts yesterday the Treasurer Peter Costello conceded that his department got it wrong in forecasting the effect of the drought back in May.
At the time the Department said it expected farm output to climb by 2 per cent in the year ahead. The revised forecast is for farm output to slide 21 per cent...
Largely as a result Australia’s overall total rate of economic growth this financial year is expected to slip from the 3.75 per cent forecast at budget time to 2.5 per cent.
And the Treasurer concedes there could be worse to come. His current forecast assumes that it will rain next year. If it does not, Australia’s rate of economic growth will fall further.
Asked why his Department had assumed that it would start to rain in the midst of Australia’s worst drought for sixty years, he replied that was standard forecasting procedure.
“We always forecast normal conditions. What else can we do? Unless somebody can tell me what the rainfall is going to be next year, all I can do is assume it will be normal. Now, we look at the last one hundred years and we say rain will be normal next year. I hope it is, but what can I do?” he said.
The Treasurer said that there was a greater risk that his forecasts would have to be revised down than up.
But he said that even with the forecast cut in Australia’s rate of economic growth the economy was still traveling well.
“You’ve got to remember that it is slowing off an incredible base. In Australia, I think we have been creating 1000 jobs a day. Now that is the kind of job creation that we have never seen in our country before. Suppose it came down to 800 jobs a day or 700 jobs a day. Nobody is going to say it is zero jobs a day. And it certainly won’t be negative jobs a day.”
Mr Costello expects Australia’s inflation rate, currently 3.9 per cent, to begin falling and to keep falling until it returns to the Reserve Bank’s target band of 2 to 3 per cent. “We would expect that in this current quarter fuel prices would actually detract from the consumer price index and we think that fruit and vegetables might actually detract from the index. We are expecting the profile of the CPI to come down to the middle of the band by 2008.”
The budget surplus forecast is little changed at 11.8 billion dollars, up one billion. The government has spent less than projected on benefits such as the Newstart unemployment payment and the Disability Support Pension, in part because of Australia’s healthy jobs market, and in part because of the tougher work tests that came into force this year, the Treasurer said. Offsetting those savings had been extra spending on measures including defence and drought support.
Asked whether drought support would continue even if the drought did not end and farms became no longer viable Mr Costello said that it would and that it would quite possibility increase if the drought did not end: “The Australian Government will stand by Australia’s farmers in a severe drought, in many respects as bad as we’ve had for a hundred years. We will stand by our farmers because they are people who work hard, they are people who love the land and they are people who are going through a tough time. And if that takes further drought assistance, we’ll do it,” he said.
“Our economy is being buffeted by drought but nobody is being buffeted to the extent of our farmers. One of the reasons why you run a strong economy is so you can help farmers in their time of need. We have increased drought assistance by over $1 billion. If the drought persists next year, drought assistance will increase as well, but we will see Australia’s farmers through.”
The Treasurer suggested that he would resist calls for further tax or spending promises leading up to next year’s election saying that at 1 per cent of GDP Australia’s projected surplus was about right. “It has taken us ten years to get to where we are now, we have got to keep our Budget in surplus. I consider a reasonable surplus to be 1 per cent of GDP,” he said.