Thursday, March 04, 2010

We're back, so spending's capped. Let's hope we really are.

Treasurer Wayne Swan has signaled we're in for that rarest of political events - a tough election-year budget.

Welcoming figures that show an extraordinary turnaround in Australia's economic fortunes from a projected collapse during 2009 to near-trend growth of 2.7 per cent the Treasurer said he would be imposing a tight cap on spending growth from this year's May budget rather than waiting a year as a literal reading of earlier commitments would allow him to do.

The government has promised to restrain real spending growth to 2 per cent per year once economic growth returns to trend.

Rather than debate whether or not economic growth is now back at its long-term trend of 3 to 3.5 per cent Mr Swan yesterday said he would implement the commitment in this budget "in any case"...

"What we are doing every year from 2010-11 is we are meeting that 2 per cent expenditure cap," he said. "We understand that's a tough discipline and it’s one we’re happy to be measured by."

A cap of 2 per cent spending growth when the economy is growing a 3 per cent or more as now projected will wind back the size of government relative to the economy at a time when demands for government spending on health and other costs associated with aging are expected to climb.

The commitment will remain in force until the Budget returns to surplus, something projected in the Intergenerational Report to take around five years.

The promise cuts some ground from under the Opposition whose Treasury spokesman Joe Hockey yesterday called on the government to return the budget to surplus in order to pay off debt.

"This is a significant moment. The government needs to stop talking recession and start talking recovery," he said. "The government must stop the big spending or else it will continue to put enormous upward pressure on interest rates."

A year ago the Reserve Bank forecast growth of 0.5 per cent throughout 2009. Instead the economy rebounded 2.7 per cent, climbing in every quarter and finishing with quarterly growth of 0.9 per cent, the highest in almost two years.

Mr Swan said Treasury modelling showed that without the stimulus economy would have contracted 0.7 per cent in 2009 and warned of threats to growth ahead saying that the same Treasury modelling showed that the wind down of stimulus measures would subtract 1 percentage point from growth during 2010.

"Many of the major measures have been withdrawn," he said. "The consumption boost is no longer there, the first home owners boost has finished, the small business and general business tax break – all of those things have been withdrawn. The stimulus peaked in the middle of last year and it will detract from growth as we go through the year."

Public sector investment surged 10 per cent in the quarter to be up 18 per cent over the year. Private investment in machinery and equipment surged 11 per cent driven by the government's business investment tax rebate.

NSW grew the fastest of any Australian state during 2009, recording growth in State Final Demand of 5.2 per cent an achievement exceeded only by the ACT which recorded government-fueled demand growth of 7.8 per cent. The economies of Queensland, Tasmania and the Northern Territory went backwards.

Published in today's SMH and Age

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