Friday, February 15, 2013

Graphed. Why the budget is bleeding

Nominal vs real GDP growth. These are unusual times:

A profits squeeze of historic proportions lies behind the government’s deteriorating budget position according to the federal Treasury, which says things haven’t been as bad since the global financial crisis.

Appearing before the Senate’s economics committee Treasury head Martin Parkinson promised to reveal details of the final deficit or surplus for 2012-13 before the September election although he was not legally obliged to.

The election is due on September 14. The Treasury’s pre-election financial statement is due on August 22, but the final budget outcome isn’t due until September 30.

Under question from Coalition senator Mathias Cormann Dr Parkinson said although he wouldn’t have all the figures ready ahead of the election he should be able to produce a final figure for the underlying cash balance - the most watched measure of surplus or deficit - well ahead of the pre-election outlook.

If the government didn’t release it before the pre-election financial statement he would release in the statement.

“Nobody will be under any illusions, or shouldn't be under any illusions, that they won't know the underlying cash balance number in time for the election,” he said. “It will be, or should be, publicly available. The bottom line will be known.”

Australia’s budget position had deteriorated swiftly because commodity prices had crumpled while the Australian dollar remained high.

“We would traditionally have expected the exchange rate to fall as well,” he said. “The fact is the exchange rate has stuck up.”

“What that has meant is that for firms in sectors such as mining where revenues are in US dollars and costs are in Australian dollars, their margins are squeezed. It's a profit squeeze that is flowing through into particular types of revenue.”

Treasury's head of Australian macroeconomics David Gruen said income growth was its weakest relative to economic growth since the global financial crisis...

In the past year nominal gross domestic product had grown far slower than real gross domestic product. Nominal GDP is the dollar value of what’s produced and earned. It’s the measure that drives tax revenue. Nominal GDP grew just 1.9 per cent in the year to December, far below real GDP growth of 3.1 per cent.

"It is extremely unusual for the dollar value of the economy to grow slower than real value,” he said.

“Our quarterly national accounts data goes back to 1959. There are only two quarters in that time in which nominal GDP growth was that far below real GDP growth - both were in the global financial crisis.”

The only other times nominal GDP growth fell behind real GDP growth were in the economic slump of 1961 and the 1997 Asian economic crisis.

Sliding commodity prices knocked four per cent off Australia’s terms of trade in the three months to September, leaving the volume of goods Australia exported high, but slashing the amount it earned from those exports. Local prices were also depressed as as retailers and wholesalers cut margins in order to move goods.

Real GDP was likely to remain depressed for the two years.

Asked how long he thought it would take to achieve a surplus in the new environment Dr Parkinson declined to answer, saying the question invited him to express a personal view.

He would work with the Tax Office and “hopefully with the industry” to try and unpick why mining tax collections were so much lower than expected.

“The initial estimate for revenue drew heavily on information from parts of the mining sector,” he said. “We adjusted those estimates for the things that we could see had changed. What we couldn’t do was adjust the estimates for things we couldn't see.”

While he believed the executives produced “the best estimate at the time”of the values they intended to ascribe to their mines they had “no legal obligation” to use them.

“They gave us their best estimate, as we understand it, their best estimate at the time - but they until the point they were legally obligated for the tax, they had the opportunity to rethink it.”

In today's Sydney Morning Herald and Age

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