Tuesday, April 28, 2009

Expect a tough one

Swan says so

WAYNE Swan has ramped up expectations of a horror budget on May 12 warning of "very tough calls" and "decimated government revenues" in the face of the most challenging conditions in 75 years.

The language - the Treasurer's strongest yet - came as he wrote to his state counterparts outlining changes to the budget forecasting methodology brought on by the prospect of recession and as Access Economics warned there would be no new tax cuts for a decade.

The latest Access report declares Australia already in recession and warns that Victoria's economy will shrink for two successive years.

Endorsing the thrust of the report Mr Swan said it confirmed "the brutal impact of the global recession on jobs, growth and revenues," while also applauding the quality of the Government's stimulus measures to date...

The Access Report says the government will have little room for further stimulus packages as it faces a downswing in revenues "deeper and sharper than in the recessions of the early 1980s and early 1990s".

Access says plummeting commodity prices will strip $40 billion per year from national income pushing the 2009-10 Commonwealth budget deficit north of $50 billion, a record in absolute terms, and pushing state budget deficits up to a combined $10 billion.

"We have laboured this point many times before, but forgive us for making it again," Access says in its report. "The boom was brilliant for tax collections, particularly from big companies. They surged so much federal Budgets could promise big income tax cuts topped up with extra family benefits and still see a lift in the size of the surplus."

"With that money disappearing fast, Canberra now faces ugly policy choices."

"The tide has gone out, and the Budget has been swimming naked."

Access says the income tax cuts already legislated for this July and next July will spend money the government will no longer have, meaning Australia may have to wait almost a decade for further tax cuts.

"That's unless we truly have the courage to tackle middle class welfare. Will the pensioners get the extra money they have been promised, or will we get an education revolution? Do we maintain the big increases in middle class welfare in Family Tax Benefit B, or will there be a national broadband network?" Access asks.

Mr Swan has wound down expectations for the May 12 Budget saying it will only have "room for money to go where it is really needed".

The comments suggest that the promised increase to the base pension rate may be wound back and that expected action on paid parental leave, superannuation and the First Home Owners Grant may also be less generous or accompanied by harsh income tests.

The Treasurer has to decide on the future of $7,000 to $14,000 First Home Owner Boost before it expires on at the end of June. He has before him the report of the Harmer pensions review, the Henry retirement incomes review, and the Productivity Commission inquiry into parental leave.

He is understood to be examining means-testing health benefits including the uncapped Medicare Safety Net, curtailing access to the Baby Bonus and Family Tax Benefit B and fully-taxing contributions to superannuation funds.

Yesterday he wrote to state counterparts including Victoria's Treasurer John Lenders advising a change in the way the budget's forecasts will be presented in order to accurately reflect the outlook for an economy "expected to enter recession".

Instead of presenting forecasts for just one year ahead and "projections" for a further three years based on long-term trends, the budget will present forecasts for two years ahead and then projections based on the growth rates actually expected.

The usual practice of using long-term trends would present a "misleading picture".

The letter says the Treasury expects below-trend growth during 2009-10 and 2010-11 and then above trend growth beyond that "as the momentum of recovery builds".

It suggests that the Treasury is more pessimistic than Access Economics which says in today's report that the economy will bounce back by 2.4 per cent in 2010-11 after shrinking during the financial year ahead.

Access expects Victoria's economy to shrink in 2008-09 and 2009-10 as the stat's consumers "dive into their foxholes and the forward pipeline of commercial and engineering construction starts to thin".

It expects the national unemployment rate to peak at 8.5 per cnet in 2010 putting almost one million Australians out of work.

In the balance

Swan's "tough calls"

. the base pension increase
. super tax concessions
. paid parental leave
. first home owners boost
. Medicare safety net
. Family Tax Benefit B

The May 12 Budget deficit is expected to top $50 billion.