Wednesday, November 10, 2010

Things are good. So Treasury's worried.


Household spending up 4%

Business investment up 8%

Exports up 7%

$55 billion new mining investment

Unemployment to 4.5%


Inflationary pressures "building"

Global risks "heightened"

Mid-year Economic and Fiscal Outlook 2010-11

Australia's unemployment rate is set to plunge to 4.5 per cent as the mining boom gears up another notch with Treasury forecasting $55 billion of mining investment this year and a 13 per cent surge in business investment next year taking export income to new heights.

But the forecasts, in the mid-year budget update, are tinged with concern.

Treasury believes the budget is on track to return to surplus as promised, penciling in an underlying cash balance of $3.1 billion in 2012-13, up from the May budget forecast of $1 billion, and marginally down from the pre-election forecast of $3.5 billion.

The high dollar has taken $10 billion out of projected revenues over the next four years, but it has actually helped revenue by around $6 billion mainly as a result of lower purchasing costs. Projected mining tax revenue will fall from $10.5 to $7.4 billion.

The net hit to the Budget from the higher dollar will be less than $1 billion this financial year and $1.4 billion next financial year. It is dwarfed by better than expected economy with this year's export growth revised up from 5 to 7 per cent, growth in business investment revised up from 7 to 8 per cent, and growth in household spending revised up from 3.3 to 4 per cent...

The overall economic growth forecast is unchanged at 3.25 per cent and down slightly from 4 to 3.75 per cent next financial year as export prices fall away from a higher than previously expected peak.

Treasurer Wayne Swan said there was "not a major advanced economy that wouldn't prefer the position we have" and added the budget was in "very good nick".

But Treasury is worried by the forecast slide in Australia's "already low" unemployment rate to 4.75 per cent mid next year and to 4.5 per cent by mid 2012.

"The tight labour market and the pick-up in aggregate demand associated with the higher terms of trade will also have implications for inflation, the Statement says, noting that Treasury's most recent estimate of the unemployment rate at which inflation pressures emerge ranges "between 4.5 and 5 per cent".

Treasury is forecasting inflation at the very top of the Reserve Bank's target band in 18 months and warns "with the economy expected to be operating at around capacity, inflation risks remain on the upside.

It says the high dollar will help contain inflation, but says expects it to fall in coming years. It hints that tighter interest rates or tighter spending will be needed before 2012.

Only nine new spending cuts were announced in the Statement, totalling just $378 million over four years. One - rescheduling spending on Victoria’s Regional Rail link – merely moved spending beyond the four year projection period where it would no longer be visible in Budget projections.

Treasurer Swan described the pruning as “bits and pieces that are around,” and said the big spending decisions would be in the May budget.

Opposition Leader Tony Abbott said he had “failed the courage test and failed the fair dinkum test”.

“The fact that the Government is still spending money as if we were in recession even though the economy is now growing quite strongly shows that they just don’t know how to manage money,” he said.

Access Economics director Chris Richardson said many of the assumed spending cuts were not yet specified and the government would soon have to replace “assumptions with courageous decisions”.

Treasury warned the projected revenue boom was far from locked in saying if “heightened” global risks hit export prices there would be “major negative implications for national income and activity”.

Published in today's SMH and Age

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