Wednesday, May 11, 2011

Budget 2010-11: Is Swan's surplus credible?

As credible as could be

Treasurer Swan has navigated a return to surplus in the face of heavy head winds. Larger than expected corporate losses accumulated during the global financial crisis and a weaker than expected economy will cut tax receipts this financial year and the next by $16.3 billion more than was anticipated in the November budget update.

The direct cost of rebuilding and assisting the states after the floods will come to $6.6 billion.

To get back into surplus by 2012-13 Mr Swan has slowed spending to a crawl – it will climb by just 0.5 per cent after inflation in 2011-12, fall by 0.1 per cent after inflation in 2012-13 and climb 1.9 per cent in 2013-14.

The average growth rate of 1 per cent per annum contrasts with around 3.7 per cent per year in the decade before the financial crisis.

To do it while expending spending in some high priority areas he has made $22.2 billion of savings cuts over four years.

Cuts to the defence budget and reprioritising of defence spending contribute $2.5 billion; freezing indexation of the thresholds for family payments and family tax benefit supplements brings in $2 billion; the flood levy brings in $1.7 billion, and a temporary increase in the efficiency dividend required of public service departments adds another $1 billion.

Equally important as a driver of the return to surplus will be what Mr Swan will not do.... Whereas during the previous mining boom the Coalition and later Mr Swan made personal tax cuts an annual event, from here on he won’t cut personal tax at all.

As the economy recovers, growing 4 per cent in 2011-12 and 3.75 per cent in 2012-13 and as tax losses are used up corporate tax revenue should increase quickly, all the more so as the minerals resource rent tax ramps up.

Wage growth of 4 per cent per annum climbing to 4.25 per cent in 2012-13 will push more and more workers into higher tax brackets.

Bracket creep will become the Treasurer’s semi-secret weapon.

His decision to freeze until July 2014 the upper income limits for families claiming family payments will make sure bracket creep bites.

By co-incidence - despite the floods, cyclone and earthquakes that have got in the way - the surplus he is projecting for 2012-13 will be exactly the same as the $3.5 billion he took with him to the 2010 election.

The government will become debt-free just a few months after it was scheduled to in 2019-20.

It’ll be the fastest budget turnaround in 44 years of records, from a deficit of $49 billion in 2010-11 to a surplus of $3.5 billion in just three years.

As with any forecast it is far from guaranteed. The world economy could turn down and mining revenue slip. Conversely the mining investment boom could continue longer allowing mining companies to write off expenses against their profits for longer. Or wages mightn’t grow by as much as the government needs in order to rake in the proceeds of bracket creep.

But given the Treasury’s central forecasts the surplus looks achievable. If profits and wages grow even faster than forecast it will be even bigger.

Published in today's SMH and Age

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