Saturday, December 15, 2007

The previous Treasurer couldn't have lied to us about the economic outlook could he?

The Treasurer Wayne Swan has promised a root and branch review of public service spending in the wake of a new Treasury forecast of eighteen months of excessive inflation.

The Treasury forecast, revealed by Mr Swan in his first public address in the role has underlying inflation running at or above the top of the Reserve Bank’s target band until shortly before the year 2010.

In his address to the Australian Industry Group yesterday Mr Swan said that underlying inflation was already running at 3 per cent and that the Treasury had warned him that worse was to come.

“In my discussions with Treasury, they have advised me that, following the September quarter CPI and National Accounts, inflationary pressures are likely to put further pressure on the underlying inflation rate over the next 18 months"...

The assessment sharply contradicts that of the previous Treasurer Peter
Costello who claimed during the election campaign that inflation was “very

Mr Swan said he wanted to be “upfront” with his business audience and warn
that Australia faced an extended period of elevated inflation and that he
had no “magic wand” with which to beat it.

What he would do was impose “a new era of fiscal discipline” to replace the
“flabby undisciplined fiscal policy settings of the past”.

By keeping a “tight reign on spending” he hoped “ease some of the burden
that has been placed on monetary policy in recent times.”

Since 2004-05 Commonwealth spending had grown by more than 4 per cent each
year in real terms.

“This is more rapid growth than at any time in the last decade and a half,”
the Treasurer said. “There has been no energy put into finding savings.”

“In the face of strong domestic inflation, even with a strong fiscal
outlook, we must monitor spending to ensure it is well targeted, and
complements other macro-economic policy settings.”

“That is why we are implementing a rigorous review of existing spending — a
new era of fiscal discipline.”

“We have already found more than $10 billion of savings, but we need to do

Mr Swan said he would be in a position to announce “substantial additional
savings” in his first budget in May.

In the lead-up to the Budget he would identify and root out the spending
items that did little to expand the productive base of the economy.

“Wasteful spending will be a thing of the past — our savings will strengthen
the budget and make room for better investments in the future,” he said.

In a subsequent interview with ABC radio Mr Swan he was prepared to boost
the budget surplus beyond the previously agreed bipartisan target of one per
cent of GDP.

“It is important in the current environment to have further savings,” he
said. “We will get our spending priorities right for the economic
conditions that we currently face, and we won’t shirk our responsibility
when it comes to finding further savings in this budget by eliminating
wasteful spending and wrong priorities.”

The $31 billion of tax cuts promised by Labor during the election campaign
would be quarantined from the review. Mr Swan said they would be delivered
in full.

“Our tax plan fits well within the bounds of a responsible fiscal envelope,
and maximises the participation incentives for those groups that we know are
most responsive to tax cuts,” he told the business audience. These groups
included Australians entering the workforce on low incomes and those facing
a 30 per cent marginal tax rate.

“Treasury modelling suggests these key components of our tax plan will
encourage around 65,000 people into the workforce in the medium-term,” he