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Wednesday, March 01, 2017

Battle over budget as Morrison won't commit to saving windfall

Australia's top economic bureaucrat has begged the government not to spend the coming windfall from soaring coal and iron ore prices, saying if it did it would repeat the mistakes of prime minister John Howard and treasurer Peter Costello in the early 2000s.

Treasury secretary John Fraser was appearing before the Senate economics committee 10 weeks before the May budget and just ahead of economic growth figures showing the strongest rebound in national income in half a decade.

Australia's real gross domestic product soared 1.1 per cent in the December quarter after slipping 0.5 per cent in the September quarter. Over the year to December, it grew 2.4 per cent, up from 1.8 per cent, and close to the Treasury forecast.

More importantly for the budget, the nominal measure of GDP, which takes account of higher cash incomes from high export prices, climbed 3 per cent in the quarter and 6.1 per cent over the year. The terms of trade surged 9.1 per cent in the quarter, the most since 2010.

Treasury analysis included in the 2016 budget found that a sustained jump of 10 per cent in the terms of trade would boost the tax take by between $2 billion and $5 billion per year.

Mr Fraser told the committee that if the terms of trade stayed high, the government should "prioritise budget repair and ensure that any additional revenue is banked as an improvement to the budget bottom line".

"We need to take great care not to fall into the trap of spending unexpectedly higher revenue, should it arise, in a way that would structurally weaken the budget as may have occurred through the early 2000s," he said.

Asked whether he would hang on to rather than spend any extra revenue as his departmental secretary wanted, Treasurer Scott Morrison told a Parliament House press conference it was "not clear" what position he would take.

"There's still some months to go before we reach a position to make that decision," he said. "We'll revisit that before the budget, so until we're in a position to do that – I mean, the answer to the question depends on the decisions which have not yet been taken."

Later, an official from the Treasurer's office contacted Fairfax Media to office to point out that the government's fiscal strategy outlined in budget documents required it to bank extra revenue resulting from changes in economic conditions.

Deloitte Access director Chris Richardson, a former Treasury official, agreed with Mr Fraser any extra windfall revenue should be banked, but said that "getting the government of the day to bank a windfall when it is polling poorly" was a big ask.

Reserve Bank figures released on Wednesday showed commodity prices had climbed 60 per cent since January 2016, and by 36 per cent in the last six months.

While some of the extra revenue would take a while to flow through to taxable profits because of the "rain shadow" of earlier losses, the budget should start looking better in 2017-18 and look a lot better by 2020-21, depending on the assumptions that were made about how long the high minerals prices would last.

Profits surged 8.4 per cent in the quarter, propelled by an outsized 16.5 per cent jump in the profits of non-financial (mainly mining) corporations.

But the nation's wage bill fell 0.5 per cent, reflecting what the Bureau of Statistics said was a 0.9 per cent slide in earnings per employee. Mr Morrison said the weak wage result was "disappointing" and that he expected high profits to flow through into higher wages.

The best overall measure of living standards, real net national disposable income per capita, jumped 2.5 per cent in the quarter and 5.3 per cent over the year, the most for five years.

In The Age and Sydney Morning Herald