Tuesday, May 13, 2008

Budget 08: A rosy view..

...from the Treasury.

They’re an optimistic lot.

Inflation, forecast by the Reserve Bank to climb to 4.25 per cent by June and then to 4.5 per cent by December not falling back to below to below 3 per cent until the end of 2010, is seen by the Treasury as hitting only 4 per and falling fairly swiftly thereafter.

That might be because the Treasury is more convinced of the power of Wayne Swan's first Swan budget to contain inflation this week than the Reserve Bank was last week when it presented its forecasts ahead of the Swan Budget.

Or it might be that the Treasury expects the Bank to push up interest rates further in order to wind inflation down...

There is nothing anywhere in the budget documentation to suggest that the Treasury believes this won’t happen.

The Treasury concedes that its forecasts are harder than usual to make.

In its words: “powerful countervailing forces are confronting the Australian economy”.

On one hand, “slower global growth, tighter credit conditions and higher interest rates are expected to slow Australia's economic growth”.

On the other, “robust growth in emerging economies is supporting large rises in Australia's terms of trade, providing further stimulus to incomes and contributing to already heightened price pressures.”

It says one of the big unknowns that could derail its forecasts is the emissions trading scheme to be introduced from 2010.

The Treasury expects government spending to climb 4.2 per cent during 2008-09 and a further 6.1 per cent during the following financial year

Spending should total $292.5 billion during 2008-09, equating to around $24,375 per Australian.
As a proportion of GDP government spending will fall from 24.9 per cent 23.8 per cent during 2008-09 before climbing again to 24.2 per cent in 2009-10.

The projection suggests that the Treasury believes that the second round of razor gang spending cuts promised by the Finance Minister Lindsay Tanner will be more mild than the first.