Friday, December 14, 2012

The OECD to tell the truth about our surplus, later today

11.30 am AEDT, Here

The Paris-based Organisation for Economic Co-operation and Development will press the government to loosen its commitment to a budget surplus Friday, delivering a 160 page report that will set out the case for allowing the budget wear the consequences of any further significant economic deterioration.

The revenue forecasts in this year’s budget were built around nominal GDP growth of 5 per cent, knocked down to 4 per cent in the mid year review. But new growth figures not available at the time show nominal GDP inching ahead at an annual pace of 2 per cent -- a rate which if sustained would wipe at least $5 billion from projected revenue, more than obliterating the wafer-thin $1.1 billion promised surplus.

The OECD will say in the event of a further big turndown the authorities should “let the automatic stabilisers work and should slow budget consolidation”.

“Automatic stablisers” are the changes that automaticly weaken the budget as the economy turns down, cutting tax collections and in some cases boosting welfare payments.

Attempting to stand in their way by boosting tax collections or cutting payments runs the risk of slowing the economy further.

The OECD made the point in a three-page summary of its views about Australia released as part of a global survey last month. It said while the current policy settings were appropriate, the government had room to delay the surplus to respond to risks. The International Monetary Fund concurred, noting in its own report that authorities had “scope to delay their planned return to surplus” should the outlook deteriorate sharply.

Both organisations consult closely with the Treasury while visiting Australia and their findings are often thought to reflect the views of the Treasury. Treasury has a full-time officer stationed at the OECD headquarters in Paris.

The government has been hoping the next set of economic growth figures due on March 6 will show an improvement. Minerals prices rebounded strongly in September, but the Reserve Bank index shows they slid again in October and November... It has reactivated its its expenditure review committee and asked public servants to search for fresh spending cuts in the leadup to Christmas.

But at the same time Treasurer Wayne Swan has been careful to avoid repeating earlier cast iron commitments to a surplus instead saying that the budget must also be “appropriate for the economy and jobs”.

Speaking to Fairfax Media in India Thursday where he was concluding a trade mission Mr Swan refused to be drawn on the question.

Former Reserve Bank board member Bob Gregory told Sky News Thursday the budget would not and should not get back into surplus this year.

“The surplus target was never really appropriate. If it was appropriate a year or so ago it’s certainly not appropriate now,” he said. “Looking forward, things are moving downwards, and when things are moving downwards you don’t want the government to help that process along - if anything you want them to slow the process.”

“Moving towards a surplus is not what virtually anyone would advise at this time.”

He said if things did deteriorate their would not be a surplus in the following year either, whichever government was in power. He expected at least two more interest cuts next year.

In today's Age

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