Wednesday, May 15, 2013

Swan's numbers. Why he is cautious, this time



Projected outcomes, May 2012

2011-12 $44.4 billion deficit

2012-13 $1.5 billion surplus

2013-14 $2 billion surplus

2014-15 $5.3 billion surplus

2015-16 $7.5 billion surplus


Projected outcomes, May 2013

2011-12 $43.4 billion deficit

2012-13 $19.4 billion deficit

2013-14 $18 billion deficit

2014-15 $10.9 billion deficit

2015-16 $0.8 billion surplus

2016-17 $6.6 billion surplus

In the face of enormous pressure to return the budget to surplus quickly, Wayne Swan has run the other way.

Extra spending this financial year and the next will boost the 2012-13 deficit by a further $2.4 billion and the 2013-14 deficit by $720 million.

Only in the following two years will the cuts in the budget overwhelm the extra spending, pushing down the 2014-15 deficit by $6.2 billion (to a small projected surplus) and pushing down the 2015-16 deficit by $12.3 billion (to a substantial surplus).

The Treasurer has adopted what he calls this "sensible, calm and responsible approach" in part because of a fear the economy could not take a sharp shift to surplus, a concern shared by shadow treasurer Joe Hockey, who told an investment conference last month the Coalition would not "go down the path of austerity simply to bring the budget back to surplus".

Mr Swan puts it this way: "Just because the global economy took an axe to our budget does not mean we should take an axe to our economy."

Changed economic conditions have ripped $60 billion from the four-year total of expected tax collections since the last budget update in October.

The budget papers include a graph making the point that if tax collections had remained as high as in the final year of the Howard government (23.7 per cent of gross domestic product), the budget would still be roughly in balance.

Swan is clawing back two-thirds of the missing $60 billion by making $43 billion of savings, most of which increase over time instead of biting now when the economy is weak.

Emblematic is the freezing of the thresholds beyond which Australians can't get the family tax benefit. The freeze will hurt no one in the coming financial year but then will raise $207 million in 2014-15, $400 million in 2015-16 and $609 million in 2016-17. The $94,316 cut-off for the family tax benefit part A seems generous now, but it will seem less generous over time as income growth pushes more and more people beyond it.

The decision to increase tobacco excise in line with average weekly earnings rather than the much slower growing consumer price index is another measure where the impact will start low and then grow.

The extra Medicare levy, to be locked in a fund labelled DisabilityCare Australia, won't bite at all in the coming financial year. But from mid-2014 it will take $3.3 billion from incomes, then, two years later, $4.2 billion. Set at 0.5 per cent of incomes, it will climb as incomes climb.

The phasing out of the net medical expenses tax offset as recommended by the Henry tax review will save only $175 million in its first year. But it will save $510 million per year by 2016-17.

So much do the measures Swan has put in place grow over time that he reckons he can fund 10 years' worth of the national disability insurance scheme and the schools improvement program with them.

But the projections aren't worth much coming from a Treasurer who, more than most, is acutely aware of how much things can change in just one year...

The budget documents make clear that any numbers produced beyond the next years are "projections" rather than forecasts. The difference is that "projections" assume standard rates of economic growth rather than forecast what it will be. By definition, "projections" don't encompass the possibility of recessions. If Australia did manage to last another 10 years without a recession, on world-record 21 it already lasted, it would indeed be a world-beating economy and would certainly able to afford DisabilityCare and the Gonski education payments.

Much depends too on an assumption that as mining investment fades mining production will ramp up to fill the gap. Investment detracts from tax collections, production builds them. But it is a guess about what will happen assuming demand from China remains high.

The projections assume an Australian dollar "around US103 cents".

This was where it was when the budget was being finalised, but it isn't where it is now. It fell below US100 cents on Tuesday and may well stay there, highlighting how difficult it is to forecast a week ahead, let alone a decade into the future.

And some of the measures involve guesswork. Tightening the tax rules to prevent multinational corporations shifting profits offshore and related tax measures are said to raise $4 billion over the next four years. But the assumption is multinationals will agree to pay the extra tax and won't find new ways not to.

If all goes as planned, government debt will peak at $192 billion, instead of the previously forecast $145 billion. The total is 11 per cent of GDP, instead of the previously expected 9 per cent. Net debt would be eliminated in 2021-22, one year later than previously expected.

In The Canberra Times, The Sydney Morning Herald and The Age

Australia's economic future is strong but uncertain, according to the Treasurer. The massive resource investment boom is shifting to a boom in production and exports. The rest of the economy is "transitioning towards broader sources of economic growth".

But while the opportunities are "great" and the future "bright", the transition "will not be seamless".

The prices Australia gets for its exports have slipped 17 per cent in the past 18 months when expressed as a proportion of the prices the nation pays for its imports, the budget papers say.

The Treasury is expecting only a small further decline in the year ahead - just 0.75 per cent in 2013-14, followed by 1.75 per cent in 2014-15. It isn't particularly confident in the forecast, observing that the prices of key non-rural exports remain "highly volatile".

One scenario modelled on worse-than-expected export prices has employment growing at 1 per cent instead of 1.5 per cent.

The economy would grow at 2.75 per cent instead of 3 per cent and tax collections in 2014-15 would be $5.6 billion lower.

This time last year, Treasury forecast an unemployment rate of 5.5 per cent. Now it is forecasting 5.75 per cent, an outcome in part reliant on those "highly volatile" assumptions.

The department is hoping investment in housing surges in the year ahead to fill some of the gap left by mining investment.

After sliding in 2011-12 and growing at just 0.5 per cent in 2012-13, a 5 per cent improvement is expected in 2013-14. Business investment will not be of much help. Treasury expects its growth rate to slide from 10.5 per cent this financial year to 4.5 per cent in 2013-14.

Inflation, which had been a deep concern for the Treasury this time last year, and had been forecast at 3.25 per cent fuelled by the carbon tax, is now just 2.25 per cent.

That's the figure the department is targeting for the next two years, punting on the dollar staying high and underlying household demand being weak enough to force retailers to continue to discount in order to shift goods.

Business profits should remain very weak in 2012-13, slipping 0.75 per cent before recovering to record 4.75 per cent growth in 2013-14 and 5.5 per cent in 2014-15. Even after the recovery, profits will rise at much less than their historical pace of about 7 per cent a year.

The Treasury blames the high dollar, which it says is having "an acute and enduring effect on profits" as companies "squeeze margins to remain competitive".

The department's central forecast is the economy will muddle through. Economic growth will be 3 per cent this financial year, 2.75 per cent in 2013-14, and 3 per cent in 2014-15.

But it makes a point in the budget papers of saying the forecasts can turn sour - they are "always subject to a margin of error".

It says its biggest forecast errors last year concerned business and housing investment.

Ratings agencies Moody's and Standard and Poor's reaffirmed Australia's AAA credit rating on Tuesday night, saying the budget made only slight changes to previous projections and the country's debt level remained low.

In The Canberra Times, The Sydney Morning Herald and The Age

Related Posts

. The Budget. What if our prime minister gave a really good speech?

. Grattan: Why we're facing a decade of deficits

. Hockey. That surplus promise - ditch it, we're not stupid