Wednesday, November 30, 2011

MYEFO: Small changes, mostly harmless

It’s Swan and Wong’s pea and thimble trick.

The economic forecasts in the economic statement are real enough - they are almost exactly in line those of those released this month by the Organisation for Economic Co-operation and Development and the Reserve Bank. Employment will grow by a diminished 287,000 over the next two years rather than the 500,000 forecast in the budget. That’s barely enough to match the increased population that will be looking for work. By June 2013 the unemployment rate will be 5.5 per cent rather than the 4.5 per cent forecast in the budget. The four-year tax revenue forecast is down $20 billion on the budget time guess, and that’s if all goes well.

Both the OECD and the government’s forecasts assume developed nations “muddle through” - that that “sovereign debt and banking sector problems in the euro area can be somehow contained and that excessive fiscal tightening will be avoided in the United States”. If that doesn’t happen, if the mix of prices Australia uses to trade with the rest of the world slip 4 per cent more than forecast, Treasury talks of a further hit to the budget of $2.5 billion this financial year and $6.6 billion in 2012-13, enough to wipe out the prized 2012-13 $1.5 billion surplus four times over.

Wherever they have had discretion Swan and Wong have moved spending out of the surplus target year and moved savings into it... The official table shows extra spending of $2.3 billion in 2011-12, 589 million in 2013-14 and 827 million in 2012-15. Fair enough, but in 2012-13 there’s a cut in spending of $1 billion. Spot the odd year out. Almost all of that cut is spending moved forward into 2011-12, much of it for flood reconstruction. Swan insisted yesterday the changed spending profile was not related to his search for a 2012-13 surplus, the spending just happened to be needed now.

The extra 2.5 per cent efficiency dividend levied on government departments applies for one year only. You guessed it, the year is 2012-13. But because the cut will lower the starting point for future departmental spending it will cut forecast spending in subsequent years as well.

All up the deficit for this financial year will be $15 billion bigger than it was doing to be, and the forecast 2012-13 surplus $2 billion smaller.

The shuffling of money and modest cutbacks will probably do no harm. They might even convince the Reserve Bank its safe to cut rates next week at its final board meeting before Christmas and a two month break.


2011-12 2012-13

Economic growth

May budget: 4% 3.75%
November update: 3.25% 3.25%

Unemployment rate

May budget: 4.75% 4.5%
November update: 5% 5.5%

Budget outcome

May budget: $22.8 billion deficit $3.5 billion surplus
November update: $37.1 billion deficit $1.5 billion surplus

Year-on-year real GDP growth, June quarter unemployment rates
Source: Mid-Year Economic and Fiscal Outlook

Published in today's SMH and Age

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