Friday, May 11, 2007

Budget forecasts already looking obsolete.

Within days of the 2006-07 budget, its forecasts are looking obsolete.

On Tuesday night the Treasurer Peter Costello brought down a budget based on the assumption that employment growth would slow and unemployment would rise.

Instead the figures for April released yesterday show employment growth accelerating and unemployment falling to yet another new generational low.

The budget was predicated on employment growth slowing from an expected annual growth rate of 2.5 per cent this financial year to 1.5 per cent next year.

Instead, an extra 50,000 Australians found work last month, many times more than expected, a rate of growth which if continued all year would exceed 5 per cent.

Tuesday’s budget forecast of an average annual growth rate of 2.5 per cent this financial year is now looking difficult to achieve. To meet it employment growth would have to dive this month and the next. To meet the forecast for next financial year it would need to keep falling steeply...

The budget was based on an average unemployment rate of 4.75 per cent this financial year climbing to 5.25 per cent by the end of next financial year. Instead, in April the unemployment rate fell to a new generational low of 4.3 per cent, the lowest rate since November 1974. To meet the budget forecast now the unemployment rate would need to climb well above 5 per cent this month or the next.

The dollar rose and the interest rates predicted by the futures market climbed on the news suggesting that financial markets now believe that the economy is stronger than predicted in the budget just three days ago.

The good news for the government is that it can credibly claim to be running an economy in which employment growth is accelerating, against its own expectations, and that it will be raising extra tax revenue with which to fund election promises.

The bad news is that the economic stimulus provided by the budget now carries with it a greater than expected element of danger.

Although inflation was subdued in the last quarter and looks set to be subdued in the next private sector economists were yesterday revising up their inflation forecasts for later in the year and many were predicting another hike in interest rates by the end of this year or early next year, within months of the election.

The employment figures follow retail trade figures, released on Tuesday just before the budget that seem to show spending growing faster than the budget expected. Retail spending accelerated in the March quarter. The budget forecasts assume the rate of household consumption growth will remain steady.

The April employment numbers also imply a continuation of flat or negative productivity growth. Yet the budget papers predict that productivity will soon begin to grow. The Treasurer was asked twice at a press conference yesterday whether he was concerned about Australia’s flatlining productivity. He said he was not.

Only NSW and South Australia now have unemployment rates above 5 per cent. Australia unemployment rate fell further in Queensland and Victoria, climbed in Tasmania and remained steady in Western Australia where the rate remains Australia’s lowest – 2.7 per cent.

In the ACT the previously low unemployment rate has been climbing since the start of the year.

The ACT’s unemployment rate has is now 3.8 per cent, up from a low of 2.5 in October. The ACT has lost 2,000 jobs since December.