You want us to work 'til 67? And then when?

"Life expectancy has increased by 23 years since the aged pension came in. Twice as many people are going on it for twice as long."

CONCERN is growing among pension and welfare groups over the move to raise the pension age to 67, with warnings it will "entrench inequality'', force more old people into poverty and lead to a growing "class divide''.

Despite initial sympathy for the move, advocates yesterday attacked the contrast between the rich still being able to withdraw their super and retire at 60, while the poor would be forced to work or struggle on the dole until 67.

There was also unease about an associated proposal in a report from the Henry Tax Review released with the Budget to lift the superannuation preservation age to 67, effectively making it impossible to get an income from either source before 67 without being in the labour market or having investments...

Treasurer Wayne Swan defended the move strongly, arguing it was essential to put pensions on a more sustainable footing given rapidly improving life expectancy.

"Currently we have five workers in Australia for every person aged 65 and over and by 2050, that will be two and a half," he said during a round of post-Budget radio interviews.

"Life expectancy has increased by 23 years since the aged pension came in. Twice as many people are going on it for twice as long."

National Seniors welcomed the move, noting that it would not come in until 2023.

But the Combined Pensioners and Superannuants Association said it would ramp up poverty among Australians in their 60s and and force people already on low incomes to toil longer in hard physical jobs.

"People in their 50s and 60s are often unable to find adequate employment, or are low income earners or are in physically-demanding jobs where it is simply not possible for them to continue work." said the association's policy officer Charmaine Crowe.

"Raising the pension age to 67 will force those people on to the NewStart unemployment benefit which we know is inadequate, or into under-employment.''

"People physically unable to work full-time will have to keep working part-time in order to sustain themselves.

"The long-term unemployed tend to be in their 50s and 60s. This is only going to lengthen the time they're on the barely-adequate NewStart."

Sydney University workplace relations analyst Michael Rafferty said the "pernicious'' move would "entrench inequality'' and force Australians - some of the hardest working people in the world - to work even longer.

"The rich can retire whenever they like and tax expenditure on super is nearly $20 billion a year - and they have only knocked off about $2 billion of that over three years,'' he said. "The rich have been hit wth a feather duster and the poor have been told you are going to work longer and harder.''

University of NSW Pensions and Superannuation Centre deputy director John Evans branded the move a "kneejerk'' decision that could damage Labor's constituency of the vulnerable.

"That's effectively what it is - a class divide,'' he said. "We were heading towards an integrated retirement system, but this goes back to the safety net.''

However the Opposition supported the move, with leader Malcolm Turnbull saying his only concern was that it would not come in soon enough.

"As Australians live longer and work longer and so forth it’s been recognised as an issue for some time. But to momentously announce you are going to increase the age to qualify for the pension and then say it won’t hit until 2023, it isn’t a courageous or particularly tough decision," he said.

David Knox , a partner at Mercer Consulting who proposed the 67 pension age in a paper prepared for the Committee for the Economic Development of Australia said whatever age was selected for the pension there would "always be some people younger than that age who are unable to work for a variety of reasons or are worn out".

"One needs to recognise that the number of blue collar workers is now proportionately lower than it has ever been, and that people who are 67 today are much healthier than were 65 year olds were when the pension was introduced."

But he expressed dismay at the associated proposal in the Henry retirement incomes report to lift the superannuation preservation age to 67.

"It surprises me. It is something I do not support," he said.

"The superannuation access age should generally be about five years younger than the pension age in order to provide flexibility. You cannot assume that everyone will retire at the same age, in fact today most people retire before 65."

Superannuation access is at present available at 55, with the age set to climb to 60 by the early 2024.

The Henry Review recommends a further staged increased to 67 in order after which it should remain aligned with the pension age in order to stop Australians spending their super payout quickly and then getting access to the part-pension.

"Only compulsory savings that are carried through to retirement take pressure off pension expenditures," the report says. "Arrangements that encourage shorter working lives also reduce participation rates and place a greater tax burden on those who work."

The Review says its final report in December will explore further the issues involved with aligning the two ages.

The Henry recommendation was welcomed cautiously by the Combined Pensioners and Superannuants Association.

Policy officer Charmaine Crowe said it was mainly high-income Australians who took out their super early and they tended to not be in back-breaking jobs.

"But there would need to be safeguards in place to ensure that if people can't work for whatever reason in their 60s they can get special access to their super."

"At the moment that is really only available to people with terminal illness, we believe the option has become available for anyone in hardship."

"Right now the government loses a huge amount of money - anywhere between $1 billion and 10 billion a year, it is difficult to qantify, because high-income earners take super out while putting untaxed salary in - the government should stop that directly."

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The Peter Martin wonderwheel

It's here, at Google.

They've added new search features, for everyone

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Rory Robertson: "Canberra’s approach sensible, defensible"

"Let me explain why. For starters, officials across the world are not making it up when they say that the global economy is the weakest it’s been since the 1930s: global GDP is set to shrink in 2009 for the first time since the Great Depression.


"Given that bleak economic backdrop, Canberra’s fiscal policy clearly is aimed in the right DIRECTION.

While one can debate the size of the stimulus and the efficiency of particular measures (if you have the time), the critical fact is that recent fiscal initiatives – mostly involving debt-funded increases in spending - have been strongly COUNTER-CYCLICAL in nature, tending - helpfully - to stabilise the economy. That contrasts with the run of pro-cyclical tax cuts delivered during the economic boom earlier this decade, which it turns out left the Budget in “structural” deficit...

Media commentary has made much of the record size of this year’s $58b deficit, the slow projected progress back to surplus over the coming decade, and the sizeable build-up of government debt in the meantime. Some observers appear to be very concerned about these things, while others are not.

To the extent that investors still care, rating agencies Standard & Poor’s and Moody’s appear relaxed about Australia’s projected deficits and rising government debt: contrary to some chatter, Canberra’s triple-A credit rating apparently is under NO real threat.

"We believe the deficits and associated borrowings do not alter the sound profile of the country's public finances," S&P credit analyst Kyran Curry said in a statement. “This is underpinned by the strength of the government's balance sheet, which provides flexibility to absorb debt levels and cyclical deficits of this nature."… Moody's also said it would maintain Australia's triple-A credit rating. "In a relative sense Australia still looks good to other triple-A rated governments and therefore we are comfortable maintaining the rating where it is," Moody's lead analyst for Australia, Steven Hess, told AAP from New York. "In a relative sense, Australia still looks relatively strong from a fiscal point of view compared to other countries so we're not concerned about the rating."

Global economic cycle is the big driver of recent Budget developments

"When thinking about things like interest rates, Budget deficits and public debt, it’s important to keep in mind that much of what happens – good and bad - simply reflects the power of the economic cycle.

That is, when an economy grows strongly year after year, interest rates go up, Budget revenues rise faster than expected, Budget surpluses emerge and grow, and public debt disappears, largely painlessly, sometimes even with tax cuts year after year.

By contrast, when an economy turns down sharply, interest rates fall, revenues surprise sharply on the downside, Budget deficits emerge and grow, and government debt balloons. If an economy goes from boom to recession quickly, as ours just did, the turnaround in these variables can be dramatic:


"The point I’m making, obviously, is that recent extraordinary developments in the main Budget aggregates – the sharp turnaround from prolonged surpluses to prolonged deficits and ballooning public debt – largely reflect recent extraordinary developments in the economy – the sharp turnaround from expansion to recession. Even recent explicit policy decisions to spend more can be labeled “cyclical” in the sense that they were a response to emerging economic weakness.

As is well-known, what has happened in Australia recently is far from unique. Most economies around the world just went deeper into recession. Most Budgets around the world just went deeper into deficit. Thus most governments around the world just went deeper into debt.

Moreover, with today’s “Great Recession” already the sharpest global downturn since the 1930s, the IMF is cheering the efforts of central bankers everywhere to ease monetary policy and of governments to ease fiscal policy, particularly by increasing spending on infrastructure. The bottom line is that Canberra is doing broadly what most macroeconomists around the world think is sensible.

The IMF’s and G-20’s grand plan, of course, is to avoid a re-run of the Great Depression. And, happily, there is growing optimism in global markets that emerging signs of economic stabilisation are – fingers crossed - in the process of limiting the economic damage to a fraction of what was suffered in the 1930s.

Would Budget story really be much different if Coalition still in power?

"With the economic backdrop having deteriorated so sharply since the mid-September collapse of Lehmans, Australia’s sharp swing from Budget surpluses to deficits clearly has little to do with who happens to be holding the reins in Canberra at present.

Given that the Coalition was keen on tax cuts and increased spending during the boom earlier this decade, it’s hard to think it suddenly could resist more of the same in the current recession. After all, recall Canberra’s quick expansionary fiscal-policy response to sudden economic weakness back in 2000-01.

While most of the bad news on the economy and the Budget has indeed emerged in the 18 months since the baton in Canberra passed from the Coalition and Treasurer Costello to Labor and Treasurer Swan, this merely reinforces the old story that - in politics as in life generally - “timing is everything”.

Note to the ambitious: if you choose to be the Treasurer, the RBA Governor or the CEO of a bank, it’s better to choose to start the job in the 1990s - when the “Great Moderation” (featuring solid and steady growth, falling unemployment and rising asset prices) still has a decade to run - than to choose to start in the late 2000s – when the “Great Recession” is just around the corner.

That is, if your timing is poor, the job can be much, much harder. Woody Allen would have been cleverer if he had said “70% of success in life is showing up at the right time”.

'Tough Budget' would have been inappropriate

"One common criticism of last night’s Budget is that it’s “not tough enough”. After all, it involves a further modest net stimulus to the economy (featuring a $33-per-week increase in the aged pension for singles).

This criticism misses the point that the aim of the game at present is to get the economy growing again, to minimise unemployment (the ultimate aim of macroeconomic policy).


"Moreover, there are some important initiatives in this year’s Budget that work to reduce Canberra’s structural Budget deficit (that previously had been masked by extraordinary boom-time revenues).

These measures include reducing the benefits accessed by the relatively well-off in the areas of health, family payments and superannuation. Also, the Treasurer announced a future increase in the pensionable age (from 65 to 67), a move that for decades has been an obvious and sensible policy step, given the quarter-century increase in longevity over the century since it was introduced.

There will be plenty of time for tougher Budgets – involving a steady withdrawal of fiscal stimulus – when the economy starts growing solidly again. In the meantime, those who are worried that public debt is ballooning can console themselves with the fact that – on current projections – Canberra’s net debt will remain modest when compared with that of countries in the G7 and Europe.

Yes, babies in coming years will be born “owing” their share of Australia’s (still-modest) public debt; at the same time, however, they immediately will begin to enjoy the benefits of the extensive public infrastructure - hospitals, roads, bridges, schools, etc - that Australian governments have put in place over the past two centuries.

Official family’s latest forecasts are as plausible as anyone else’s

"Another high-profile criticism is that Canberra’s deficit-reduction plan over coming years is based on 'optimistic' growth forecasts. But is there a deficit-reduction plan in the world at present that doesn’t rely on stronger growth down the track (and assumed spending restraint from thereon)?

Yes, Canberra’s forecasts may turn out to be optimistic. But how would anyone know with confidence at this point? I’ve made the point regularly over the years that forecasts, by their very nature, are inherently unreliable.

As reported in the media over recent days, Canberra now expects the unemployment rate to peak near 8-1/2% After a series of upward revisions, many naturally will be skeptical that unemployment will stabilise below double digits. We’ll see.

In any case, the forecast 4-1/2pp rise in this cycle would be smaller than the 5pp increases Australia suffered in both the early 1980s and the early 1990s. While an RBA unemployment rate (point) forecast remains conspicuously absent, it too now is guessing that our late-2000s recession will be less-severe than its two predecessors.

That is, the RBA last Friday forecast a peak four-quarter decline in GDP of 1-1/4% this time around, smaller than the peak four-quarter decline of 1.6% in the early 1990s and 3.4% in the early 1980s.


Like some others, I worry that Australia’s recession will be deeper and the recovery weaker than Canberra assumes, but I wouldn’t pretend to have a much bigger clue about the economy two or three years down the track than anyone else.

At this point, the latest economic scenarios published by Canberra and the RBA – both featuring recession followed by an eventual return to above-trend growth – probably are as reasonable as any alternative set of forecasts."

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So. Where were we?

The Budget, oh yes.

Right now I feel that I've given up on this lot.

They couldn't introduce good policy in their first budget, they had the need and opportunity to make that good in their second, and couldn't.

They got done-over over FuelWatch (mild but perfectly reasonable good policy) and done-over over Alcopops (also mild but perfectly reasonable good policy) early.

So they've come close to shutting up shop.

Good policy gets vetoed or introduced largely neutered.

Tuesday's budget documents were amongst the least-clear on record. Why? Because they began to do stuff and then undid it, and in the rush to put the presentations together they weren't able to properly explain what they were doing.

If you click on the link below, it'll take you to what I wrote - and I probably got that some of that wrong too. The presentation was a shemozzle.

The opening pages or so the Budget speech are beyond parody.

Swan's trick of not even mentioning the size of the deficit/surplus is a first, well almost.

As for the forecasts, they may well turn out to be right, or not. What will happen as the economy recovers is fairly forecastable. When that will happen is pretty unforcastable.

It could be next month, it could be next year, it could be in three years' time.

Your guess is good as Treasury's - probably better.


Treasurer sets sights on well-off

HIGH-INCOME earners bear the brunt of Wayne Swan's assault of the deficit, with superannuation concessions, pensions, private health insurance, family benefits and proposed parental leave all more severely means-tested, in part to pay for very generous, already-legislated tax cuts.

But while Australians earning more than $80,000 will enjoy a cut in the 40 per cent tax rate to 38 per cent from July 1, the pain will creep up more slowly on higher-income earners.

The upper limits on how much high-income earners can pump into superannuation at the concessional tax rate will halve on July 1, falling from $50,000 to $25,000 for people under 50 and from $100,000 to $50,000 for those over 50.

In four years the over-50 rate will vanish and all Australians will be limited to getting concessions on an indexed $25,000.

Contributions at that level are made by the very highest earners — less than 1 per cent of Australians under 50 and just 1.6 per cent of people over 50, but the measure will save $2.8 billion over four years.

Future high-earning part-pensioners will be worse off under new taper rules that will reduce their pension by 50 cents in every extra dollar they earn instead of 40 cents.

The maximum a couple can earn and still keep a pension will fall from $72,423 to $59,228 and the maximum a single pensioner can earn will fall from $47,444 to $38,693.

But existing part-pensioners will get to keep what they get right now plus an extra $32.49 a week for singles and $10.14 a week for couples combined, for as long as they are working. The measure will free up $1.2 billion, but in a way that even higher-income earners will not notice.

The private health insurance changes hit high-income earners with less carrot and more stick. People earning more than $75,000 and families earning more than $150,000 will get much lower rebates for taking out insurance, falling from 30 per cent to 20 per cent to 10 per cent and to zero if a family earns more than $240,000.

Families earning more than $180,000 and families earning more than $240,000 will be slugged with extra tax levies of 0.25 per cent and 0.5 per cent respectively on top of the present 1 per cent penalty if they do not take out private health insurance. Treasury says private health coverage will be little changed, but the budget will save $1.9 billion over five years.

Labor imposed means-testing on a range of previously universal family benefits in its first budget, denying Family Tax Benefit B, the Dependent Spouse, Housekeeper, Invalid Relative and Parent tax offsets as well as the baby bonus to families earning more than $150,000 a year.

This budget freezes the $150,000 threshold for three years, which means more families will be caught up in it over time as incomes rise. It also freezes for three years the income limit at which Family Tax Benefit A cuts out.

The combined measures will save $1 billion over four years.

When paid parental leave begins in 2011 the payments will not go to families in which the primary earner takes in more than $150,000.

Because only 3 per cent of Australians earn more than $150,000, most of the measures will leave most Australians untouched, and even most higher-income earners unharmed. High-income earners will be affected, but many only slowly, over time.

Mr Swan is banking on most Australians having little sympathy for the top strata of earners.

Mr Rudd is banking on the Senate feeling the same way.


Review shatters Keating dream and makes case for role of pension

PAUL Keating's Labor dream of extending universal super contributions to 12 per cent of every salary has been shattered by the first report of the Henry Tax Review, released by Mr Swan with the budget.

The review's retirement incomes report finds that 9 per cent will be enough to give most Australians "a substantial replacement of their income, well above that provided by the age pension" when a complete generation has been through the system.

It says that while lower-income earners might still have to rely on the pension, any increase in the 9 per cent compulsory contribution rate would run the risk of damaging their working incomes. The finding, which the review says will be elaborated on in its final report in December, stops dead the labour movement's long-term plan to increase employer contributions to 12 per cent and then to 15 per cent.

The review has also found against extending compulsory super coverage to Australians earning less than $450 a month as the costs involved would outweigh the benefit to the employee.

Although not presented in these terms, the recommendation would have the effect of keeping a lid on superannuation tax breaks disproportionately directed to high-income earners.

Another far-reaching recommendation would have the age at which money can be withdrawn from superannuation slowly increased to 67, the age to which eligibility for the old-age pension is to be increased to.

The change would end the schemes under which workers nearing retirement can both salary sacrifice into superannuation and take money out at the same time, cutting the effective tax rate on that income to 15 per cent.

The Treasurer made no comment on the recommendations in receiving the report but separately cut the amount high-income earners could pay into a super fund at the concessional rate from $50,000 to $25,000 for Australians under 50 and from $100,000 to $50,000 for Australians over 50.

From 2012-13 all Australians will be limited to contributing $25,000.

Mr Swan also cut for three years the government co-contribution to low-income super accounts from 150 per cent of voluntary contributions to 100 per cent, later increasing to 125 per cent.

The Henry Review signalled that its recommendations do not mark the end of its examination of super tax concessions, observing that there was a "case for distributing assistance more equitably between high and low-income individuals" and promising in its final report a comprehensive review of the tax treatment of saving and investment.

Its biggest concern appears to be not that super savings are inadequate, but that they are too quickly spent. It says as people live longer there is a growing risk they will "exhaust their assets before they die". Because very few commercial products are available to insure against that risk, the review says it is open to considering whether the government should provide such insurance.

The review says that a century ago a male retiring at 65 could only expect to live a further decade, and about half the population did not even make 65. Today five in every six live beyond 65 and a typical male will live another two decades.

It has signalled that its recommendation that super payouts be limited to retirees over 67 might not be the end of reform, saying that the new age limit should be examined again after 2020.

In a rebuff to the superannuation industry, the review argues that the age pension has a continuing role to play in Australia's retirement system, in part as a safety net should the investment incomes of superannuation funds be too low. "The pension supports people who live longer than expected and exhaust their private savings, and it supports those who have less-than-average full-time employment due to periods of unemployment, caring responsibilities, working part-time or spending part of their working life overseas," it says.

The review finds arguments against extending compulsory super to small business people and the self-employed, saying many have "alternative strategies for saving for their retirement" and would be inconvenienced by compulsion for no obvious benefit. It will decide its final position on the question by December.

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Tonight's the night

At 7.30 pm

Here's where to look:

The budget documents, including the speech, which acts as a guide will be here on the Budget site from just after 7.30 pm.

Mirror sites here and here and here and here.

ABC TV and local radio will carry the budget speech live from 7.30 pm AEST. After that Kerry O'Brien will host a half-hour TV special and Tony Eastley will host a one-hour radio special.

Also shortly after 7.30 pm these websites will be buzzing with info:

The Age

The SMH

The Australian

Also Crikey will provide coverage from 8.00 pm AEST (at least for subscribers)

And in the morning there will be massive and different coverage in the paper versions of the newspapers. Buy one, my salary depends on it.

Enjoy.

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I'm going in!

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Behind the Budget with Wayne Swan

My gosh!



Sleep tightly tonight, Wayne.

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And the budget deficit is...

$58 billion

It's (as good as) official.

Strange business, this.

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Budget deficits? We've been here before.

And we need to be there now.



Graph from Bill Mitchell who writes about them here.

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Budget leaks

Crikey's list.

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The Coalition's nauseating hypocrisy

And who was it who also invented the idea of "core" and "non-core" promises?

Gittins today:

"If it's news to you that the cash splash was invented by the sainted Howard, let me remind you. In the 2001 budget he and Peter Costello gave a one-off payment of $300 to everyone of age pension age, plus cash payments of $25,000 each to former prisoners of war of the Japanese, at a combined cost to the budget of more than $900 million."

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Budgetwatch: Let's abolish Defence

Access says that's the scale of the task 

Getting the Budget back into surplus will be not merely "tough" as the Treasurer claimed yesterday, it will be almost impossible in the view of Access Economics.

Australia's leading budget analysts, known as the "Treasury in exile" for their ability to closely track government finances say the deficit forecast to be announced on Budget night should be $59 billion - close to an all-time record as a proportion of GDP.

Even if the economy begins to recover in the following financial year as the Budget is tipped to forecast, the 2010-11 deficit will be little better.

But that's not what really worries Access. It's that even after the recovery is well entrenched, the government will still need to hack $25 billion to $30 billion from its annual budget in order to eliminate the deficit...

To put into perspective "how painful this would be" ," Access says in its pre-Budget monitor released this morning that the government would have to abolish the entire Department of Defence and its associated spending.

An alternative would be to abolish the age pension rather than raise it, or to abolish both the unemployment benefit and the disability pension.

Access Director Chris Richardson says another cut that would almost do the trick would be to abolish both Medicare and hospital funding.

Increasing the Goods and Services Tax to 15 per cent would also work so long as the government passed on "not an extra cent to the states or pensioners."

If the government wanted to use income tax to make up the shortfall it would have to raise the marginal rate on all income earned over $40,000 to 45 per cent.

"Eating the rich, that is raising their tax rates or cutting their superannuation tax breaks, simply won't do it," Mr Richardson told The Age.

"It won't happen until middle Australia feels plenty of pain."

Asked whether the Budget might remain in deficit until the 2020s rather than 1015-16 as the Budget will project, Mr Richardson said that was what would happen unless both both sides of politics became unusually courageous.

"Politicians on both sides still don't realise the size of the task," he said. "Even worse, some who do are daunted and frozen in the headlights."

Mr Richardson isn't suggesting cutbacks right now. Indeed he says while families and businesses are cutting their own spending in response to the recession it is entirely proper for the government "to help fill the gap with its own additional spending". Otherwise unemployment will climb even higher than the peak of around one million Access is expecting.

The problem is that when the economy does start to recover this government will find that the previous one left the tax cupboard pretty bare.

As it gave away more and more income tax revenue in successive tax cuts, the Coalition increasingly relied on the booming corporate and capital gains tax revenues that are now collapsing.

"Company tax takings are about to slide, the taxes paid by super funds are tanking and petroleum Resource Rent Tax will be a shadow of its former self," Mr Richardson said.

"Governments usually hold their policy fire to assist with fighting downturns. The previous one handed back the fiscal dividend of the good times in the good times, limiting our ability to fight recession now."

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Swan's draft speech "covered in handwritten edits"

Today's Treasurer's Economic Note:

"This note comes to you as I’m putting the finishing touches on the Budget, before it goes off to the printers ready for Tuesday. The note’s a bit shorter this week because I’ve got to get back to a speech draft that’s currently covered in messy handwritten edits!

It has been an arduous task putting this year’s Budget together but above all an honour to work late into the night with some extremely talented public servants, fuelled by a fair bit of pizza and Indian take-away, to try and construct the Budget the nation needs in the tough times imposed by this global recession.

The central core of the Budget is a really complex balancing act between continuing to stimulate the economy now to support jobs, while having the courage to make some very hard choices so we can make room to deliver for pensioners, for investment in the future, and so the Budget is sustainable in the long-term....

Jobs Outcome

Last week’s labour force figures showed the unemployment rate fell to 5.4 per cent in April, down from 5.7 per cent in March. While we don’t get carried away with one month’s figures, any result that exceeds market expectations like this one is certainly welcome news. This result was particularly good news for the 49,100 Australians who found full-time work in April.

Unfortunately, we still anticipate the labour market will soften over the next 12 months, and the Budget forecasts will reflect that. That is why it’s so important the Budget will continue to support jobs and cushion Australians from the worst impacts of the global recession.

Last week we learnt that unemployment in the US has risen to 8.9 per cent, its highest level since 1983. While the magnitude of job losses is moderating, the US economy is continuing to shed more than half a million jobs a month. Since the US recession began, 5.7 million jobs have been lost. Other economies are similarly affected. Unemployment is 8.9 per cent in the euro area, 8.0 per cent in Canada, and 6.7 per cent in the UK.

Retail Boost

We also received further evidence last week that our economic stimulus measures have been successful in supporting the retail sector, which employs over 1 million Australians.

Retail trade data showed the value of Australian retail sales increased by 2.2 per cent in the month of March. The Fact of the Week is that monthly retail sales turnover is now 4.5 per cent higher than it was in November last year (the month before our first economic stimulus payments started to flow to pensioners and families). During that same period, retail sales have fallen 2.5 per cent in the US, 3.1 per cent in Japan, 2.2 per cent in Germany, 3.1 per cent in Canada, and 1.7 per cent in New Zealand. You can find more information on the retail trade result and market economists’ reactions in this article.

On the back of our positive retail trade figures, we also learnt last week that Australia recorded its second largest trade surplus in March. This was the eighth month in a row that Australia has recorded a trade surplus, and was driven by both an increase in the value of rural exports and a fall in the value of imports.

Statement on Monetary Policy

The Reserve Bank released its quarterly Statement on Monetary Policy last week, which highlights the impacts on Australia of the sharpest synchronised contraction in the world economy in living memory. It notes recent indicators suggest economic activity continued to decline in Australia in the early part of 2009, but at a significantly more gradual pace than in many other advanced economies.

The RBA report points to the Government’s “substantial fiscal initiatives” as a key reason why Australia is outperforming other countries. It states the Government’s economic stimulus measures together with the substantial interest rate cuts “are providing significant support to domestic demand, and will continue to do so over the period ahead.”

In other Reserve Bank news, the RBA Board decided to leave the cash rate unchanged at 3 per cent at its meeting on Tuesday. It’s important to keep in mind that the RBA has already cut rates by 4.25 per cent since September, down to their lowest level in almost 50 years.

Budget

On Tuesday night, I will deliver a Budget that won’t shirk the tough decisions that are absolutely critical in making sure Australia is strongly positioned for the recovery when it comes.

Some of those decisions will be met with disappointment. But we haven’t taken these decisions because they are easy, quite the reverse. We’ve taken difficult decisions because we haven’t faced a more challenging set of economic conditions in our lifetimes, and we’ve got to do the right thing by the country.

Wayne Swan

Treasurer of Australia

Sunday 10 May 2009

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Out of recession within months!

Good news, eh?

AUSTRALIA will be out of recession within months according to new forecasts from the Reserve Bank, but it warns the path back to economic health will be slow and uncertain.

Released ahead of next week's Budget, the Reserve Bank's forecasts suggest that the worst of the recession is upon us right now, although it expects unemployment to climb for some time.

The Bank predicts that the negative economic growth recorded in the December quarter will be repeated in the March quarter and then in the June quarter with the economy shrinking by a total of 1.25 per cent before beginning to pick up from the middle of the year.

That would make this decade's recession both shorter and less severe than those of the early 1980s and early 1990s...

But the pickup will be more gradual than after either of the earlier recessions with the economy growing by a mere 0.5 per cent throughout 2009-10. The Bank isn't expecting a return to trend growth until 2010-11.

This is a year sooner than the Treasury which is preparing next week's Budget on assumption that Australia will not return to normal growth until 2011-12.

The Bank's Quarterly Statement says conditions were "deteriorating rapidly" up until February. Since then it has seen "signs of a turning point."

Both China and Korea have recorded stronger economic performance in recent months and both appear to have been stockpiling resources, leading to substantial price rise3s for Australian metals including copper, lead and zinc.

The Bank also points to encouraging signs in the United States and an improvement in global share prices which have climbed 30 per cent from their low in mid-March.

Its forecasts for Australia assume some impact from the early stages of building the national broadband network and from the "modest additional stimulus" it expects in the Budget.

It says real household income after interest payments jumped more than 9 per cent in the year to December, boosted by its own interest rate cuts and around $8 billion in stimulus payments. It expects the next $12 billion of stimulus payments to further bolster income and spending but it notes that working in opposite direction is an 8.5 per cent cut in household wealth and the fear of rising unemployment.

Although the Bank does not put a figure on its unemployment forecast it says its liaison discussions with businesses point to hiring freezes, labour shedding and cuts in working hours.

It says there has been a "significant increase in the number of full-time workers temporarily working shorter hours" and that in past downturns this led unemployment.

Businesses are still winding back investment and when rolling over loans are being charged higher margins. The big five banks have virtually taken over the mortgage banks accounting for 4 out of every 5 new loans, well up from 3 out of every 5 before the economic crisis. Hardly anyone is taking out fixed-rate mortgages with all but 2.5 per cent of new mortgages at variable rates, the highest proportion since the last recession when Australians punted that mortgage rates would continue to fall.

The Bank notes that financial markets expect it to cut its cash rate at least one more time over the next few months but has not factored a further cut into its forecasts.

It says its forecast of an economy recovery-year is subject to more than the usual number of risks and uncertainties. On the downside there might be further bad news about the US or European financial systems and China's emerging recovery may not take hold.

But on the upside the firms that have shelved their investment plans might bring them forward more quickly than expected as the recovery gathers steam.

Read more >>

What the government can expect Budget night

Julia Gillard got a taste yesterday:

"JOURNALIST: Could you live off the employment benefit of $32 a day?

JULIA GILLARD: I think life is very tough for people who are on Newstart, and the thing most people desperately want if they are on Newstart and they’ve lost their job, is to get back into the employment market and get another job. That’s why we’ve announced a series of programs and policies to help support Australians to get work.

Clearly our economic stimulus is about supporting Australian jobs. Our package of nearly $300 million to give more intensive employment assistance to workers who find themselves redundant is about supporting people back into work. Our Securing Australian Apprenticeships package is about helping apprentices who find themselves without a job midway through training to get that all important next job so they can finish their apprenticeship. The Compact with Young Australians that the Prime Minister announced out of COAG very recently is also about supporting young people in this period, whilst the global recession hits our nation and hits Australian jobs.

JOURNALIST: But would it be nearly impossible to live off that sort of money, $32 a day?

JULIA GILLARD: We’ve said our focus, and the best thing you can do for someone who’s lost a job, is to help them find a way back into a job. We are doing that through the employment services measures I’ve announced, as well as companion training measures that the Government has also announced."

Tip- prepare for it, or raise Newstart.

Read more >>

The graphs that answer questions

From the Reserve Bank's Quarterly Statement


1. Which house prices are climbing, and which are falling?



2. Who has rushed into the housing market?



3. Are our big banks cleaning up at the expense of other lenders?



The Statement answers other questions as well.

Read more >>

Did the March bonus payments boost consumer spending?

Joshua Gans thinks "not much".

As he puts it in comments:

Peter, the tone of this seems strange. If spending jumped 2.2% that is about $418m right ($19b x 0.022). So that means the marginal propensity to consume is just 10 percent given that the March stimulus was $4b.

Am I missing something? Why the celebration?

1. Let's look at the ABS graph:




It can be seen that the December stimulus payment continued to have an effect well after December, and that effect continued well into February, and is probably continuing still.

Retail spending in each one of the months since December has been much higher than it would have been under any plausible scenario. I did the figures a month ago and put them here.

2. Also the $3 billion in March bonus payments would have barely been gone into accounts... when the March retail survey was done. It is unreasonable to say that 90 per cent was saved - "not yet received" or "awaiting a visit to the shops" would be a better description.

3. And if the December bonus payment is any guide, it is quite clear that the extra spending from the March payment will continue for some time.

4. And a lot of the extra spending won't captured in the retail trade statistics. You would need to bulk up those stats up to get an idea of how much of the bonus was spent.

So I reckon things look pretty good. Yes, there would have been more effective ways to stimulate the economy (and the government has tried some of those as well), but there also would have been worse ways.

In any event, there won't be further stimulus payments. The recipients don't like them. We're a funny lot.

Read more >>

Spare a thought for Zimbabwe

The IMF reports today:

"The central government’s revenue and expenditure effectively collapsed in 2008. With economic decline and hyperinflation eroding the real value of accrued tax liabilities, budget revenue fell from almost US$1 billion (25 percent of GDP) in 2005 to US$133 million (4 percent of GDP) in 2008. Expenditure shrank from about US$1.4 billion (37 percent of GDP) in 2005 to US$258 million (8 percent of GDP) in 2008 causing an almost complete collapse in the provision of public services, including a significant reduction in electricity generation capacity, collapse of water supply, and major disruptions in railway services."

Read more >>

Employment has GROWN, not fallen, according to the official figures

Uggg!


Here's one way to make sense of it. Officially, employment grew by 27,300 in April. The ABS standard estimates say we can be 95 per cent confident the true change was somewhere between a drop of 33,300 and a gain of 87,900 people in jobs.

Read more >>

This debt nonsense...

Tim Colebatch, who actually is worried about debt, puts it in its place in today's brilliant article

"Debt can be dangerous: in 1990 it almost brought down Rupert Murdoch's News Corporation, and in 1992 it did bring down the Kirner government. But Murdoch has kept on borrowing, more prudently now; he pays $1 billion a year in interest, but keeps borrowing because what he does with the money is worth more."

"POOR little kid. If you believe the Herald Sun, "little Tiziana Perez was born yesterday with a $6000 debt". And all because she was born in Victoria, and the Brumby Government projects that the net debt of the state's non-financial sector will reach $31 billion by 2013.

What a start to life! Only a heartless pedant would point out that Tiziana could hardly be born with a share of the debt as it might be in 2013, but at most, with a share of the debt as it is now. On the budget numbers, that's $11 billion in the non-financial sector - with 5.4 million Victorians, that's roughly $2000 a head.

But on the budget numbers, that debt is expected to grow to $31 billion by 2013, when Tiziana turns four, or $5450 a head. Isn't that too much debt for a little child to bear, or even for you and me to bear?....

Continued in The Age

Derryn Hinch takes the same line.

And Jessica Irvine

And me

Read more >>

Are the cash splashes making us splash cash?

You bet

WAYNE Swan and Kevin Rudd have received a ringing endorsement of their $20 billion series of "cash splashes" as new evidence points to a four month-long shopping shopping spree unmatched in the developed world.

Retail sales figures for March point to a jump of 2.2 per cent in seasonally-adjusted spending, more than offsetting a dive of 2 per cent in February.

Since the first stimulus payout in December Australian retail spending has climbed an extraordinary 4.5 per cent, a result unmatched in the United States in which spending slumped 2.5 per cent, New Zealand in which spending slumped 1.7 per cent, and Canada and Japan in which spending slumped 3.1 per cent.

Only in the United Kingdom among other developed countries did spending increase in those four months and that was by 1.6 per cent, less than half of the Australian boost...

Australians spent a seasonally-adjusted $76.6 billion in the four months following the stimulus payments, more than in any four-month period in Australian history.

Economists surveyed yesterday expected the good news to continue.

"We’ve got every reason to think that sales will maintain decent momentum going forward," said ICAP Securities economist Adam Carr.

"The second stimulus package has only started to hit consumers ensuring that retail sales are likely to remain buoyant over the next couple of months," said CommSec economist Savanth Sebastian.

The $8.7 billion December stimulus handout was followed by $4 billion in March and a further $7 billion in April.

A belief that the stimulus payments were flowing through into spending is one of the reasons the Reserve Bank board decided to keep interest rates on hold at its meeting on Tuesday.

Updated Reserve Bank forecasts to be released tomorrow (FRI) will show that the bank is expecting Australia to return to economic growth at the end of the year after what would be one of the mildest recessions on record.

The Bank's view was endorsed by the International Monetary Fund yesterday which predicted that the Australian economy would return to positive growth in 2010 after shrinking 1.1 per cent in 2009.

In a strong endorsement of economic management in Australia and New Zealand the Fund said in its Regional Outlook for Asia and the Pacific that that this was due to those nation's "strong policy response, healthy financial sectors, and exchange rate depreciation".

Treasurer Wayne Swan accepted the compliment but noted the report also highlighted the effect of the global recession on Australia's customers including Japan, South Korea and Taiwan.

Emerging Asian economies excluding China and India were set to contract by "a staggering" 15 per cent over the year.

He welcomed the retail trade news saying the Coalition had to explain why it had opposed the measures now shown to "have clearly been very effective in supporting activity and jobs in the face of a savage global recession".

At the National Press Club Opposition Leader Malcolm Turnbull said it was unsurprising that if "you handed out billions in one hit, some it will be spent".

"Yes, it has had an impact on retail sales figures, but it was very little bang for a very big buck. If you want to spend government money on stimulating the economy you should spend it on infrastructure."

The extra spending in the four months since the stimulus payments has been spread across all states and concentrated in department stores in which spending jumped 10 per cent.

"The windfalls have allowed consumers to accelerate planned purchases that they would have been saving for and department stores were the lucky recipients," said CommSec economist Savanth Sebastian. "No doubt consumers are still hunting for discounts and bargains, a trend that is likely to continue in coming months."

Other economic news pointed to Australia's second-biggest trade surplus on record, $2.4 billion in March, brought about by sharply higher rural exports and a further fall in imports.

Employment figures due for release this morning are expected to show a another drop in the number of Australians in work and a further rise in the unemployment rate, at present 5.7 per cent.

Read more >>

So high income earners will lose some of their superannuation tax dodges

I feel sorry for them. Not.

KEVIN RUDD has been accused breaking an election commitment by preparing to limit superannuation tax breaks for high income earners in next week's Budget.

The Opposition says that shortly before the 2007 election Mr Rudd promised there would be "no changes to the superannuation laws, not one jot, one tiddle.”

Six months later it set up the Henry Tax Review with a mandate to examine every aspect of the superannuation tax arrangements but one, tax-free payouts for over-60's.

The retirement incomes part of Dr Henry's report has been with the Treasurer since March.

It is understood to find that 37 per cent of Australia's superannuation tax concessions go to the top 5 per cent of income earners...

Its recommendations are not detailed, but indicate a number of broad directions in which the panel believes superannuation taxation should move.

As a result of the report and in order to make room for other spending in the Budget the government is preparing to move in at least one of those directions by halving the amount high-income earners can salary-sacrifice into superannuation.

The maximum would be cut from $100,000 to $50,000 for people aged over 50, and from $50,000 to $25,000 for people under 50.

Modeling prepared for the Budget suggests the measure will hit hardest Australians on exceptionally high annual incomes of $221,000, leaving untouched the 98 per cent of Australians who do not salary sacrifice into super.

Coalition superannuation spokesman Chris Pearce said Mr Rudd made the promise about no change to the superannuation rules just one week before the election.

"And here we are around 17 months later and there is all this speculation which is providing no certainty or confidence to anyone," he said.

"I have my own constituents coming in my own office every week asking should they be doing this, should they be doing that. They don’t know what to do. They’re fearful that the goal posts are being moved again."

The Coalition introduced tax-free payouts for Australians over 60 in its second-last budget in 2006. The move sparked a wave of multi-million dollar voluntary contributions to super funds in order to get in ahead of associated tighter contribution limits.

If the Rudd government does tighten those contribution limits next Tuesday the change is expected to apply form midnight budget night in order to prevent a similar rush.

Financial planners say they have been inundated with requests with set up salary sacrifice schemes ahead of the Budget in the belief that existing schemes will be "grandfathered" and exempted from the tighter rules.

They are telling many people who come to their doors that it is now too late to set up such a scheme as at least one salary payment would need to be sacficed ahead of the Budget.

Separately six pensioner and welfare groups yesterday called on the government to extend any boost to pensions to parenting payments for sole parents. The government has promised only to boost aged pensions, carers payments and disability benefits.


NOT SO SUPER FOR SOME

What the budget has in store

Salary sacrifice limits for over 50s to be halved, forcing high-income Australians to take more of their income as taxed wages and less as confessionally-taxed superannuation contributions.

The limit to be cut from to $100,000 to $50,000 for Australians over 50, and from $50,000 to $25,000 for Australians under 50.

Budget saving of $2.7 billion over four years.

Only 2 per cent of Australians potentially affected. 98 per cect do not salary sacrifice into super.

Read more >>

Have the government's two stimulus payments had an effect?

Today's retail trade figures and this graph from IPAC's Adam Carr suggest so:

Read more >>

Now for the good news

Things are about to get better, in the view of our Reserve Bank. Let's hope.

AUSTRALIA'S Reserve Bank sees good times just around the corner and will this week publish forecasts pointing to a recovery before the end of this year.

The cautiously upbeat assessment lies behind the Bank's decision to leave interest rates on hold Tuesday and leaves open the possibility that it will not cut rates again.

The Bank is encouraged by signs that China's economy has picked up in recent weeks and that Korea has returned to positive growth.

It also believes that commodity prices may have stopped falling and noted in the statement released after the board meeting that many commodity prices had firmed a little".

It is placing considerable store on reaction to the results of the results of the "stress tests" on US financial institutions due for release Thursday...

A widespread positive reaction could mark a turning point in global confidence.

On the home front the Bank believes that Australia is in recession but that most of the effect of its six interest rate cuts is yet to be felt.

The Bank began cutting rates in September - only eight months ago. Its models suggest that the effects of each rate cut builds and peaks at around 18 months, suggesting that the cuts it has cuts it has made to date will have a powerful effect in the months ahead without the need for further ones.

It is aware too that the most-recent round of stimulus payments has yet to be spent and that next week's Budget should provide a further modest boost to the economy, although it has not been briefed on the contents of the Budget.

It will release its economic forecasts, which often differ from those of the Treasury, on Friday just a few days ahead of Tuesday's Federal Budget.

It will stress that there is greater than usual uncertainty surrounding its views and that unforeseen events could push the economy in either direction.

Just as the collapse of Lehman Brothers in the United States in September triggered the wave of fear that brought on the global recession, the response to the this week's US stress tests could either boost confidence, leading the world out of recession or further depress it, cutting short the early signs of recovery.

The Bank believes that it is possible it may not need to cut its cash rate again below its current long-term low of 3.0 per cent, but it stands ready to cut should it need to in response to signs that the economy is not recovering as it expects.

During Tuesday's board meeting the Bank received welcome news on building approvals suggesting that house and unit construction is now on an upward trend.

Building approvals rose by a seasonally-adjusted 3.5 per cent in March after an upwardly revised 8.0 per cent in February, ended seven months of falls.

Victoria's bounce-back was the strongest in the nation. Its building approvals have been growing for four consecutive months and are 30 per cent higher than their trough in November.

Read more >>

The Budget - a look inside

Courtesy ANZ and Reuters (via CommSec):

"The 2009-10 Commonwealth Budget is shaping up as one of the most important economic policy documents in over a decade.

• We expect the government to revise down its expectations for the economy, with both real and nominal GDP forecast to contract in 2009-10. The government is unlikely to forecast real economic growth returning to trend before mid-2011.

• We expect that the starting point for the 2009-10 Budget has deteriorated significantly since February’s Budget update. Before any new policy announcements are taken into account, a weaker economy is expected to drag the 2009-10 Budget starting point into deficit of around 4% to 4.5% of GDP, worse than the largest deficit in the last recession (1992-93).

• The Government must balance counter-cyclical policy priorities with medium-term productivity enhancing objectives as well as a financial discipline that does not undermine the Commonwealth’s credit rating.

• It will not all be good news next week; permanent spending initiatives will need to be offset by permanent savings if the Government is to convince the broader community and the ratings agencies that they are serious about returning the Budget to balance as the economy recovers....

• We expect the Government to announce the largest budget deficit in over
50 years next week. Once new policy decisions are taken into account, we
expect the 2009-10 deficit to be at least $57bn or 4.8% of GDP. Deficits
should improve to around 3% of GDP by 2012.

• We expect the focus of government spending to shift away from shortterm
direct fiscal stimulus towards investment and infrastructure.

• Large deficits will require increased bond issuance. The AOFM will be
tasked with borrowing almost all of the deficit next financial year.

Including refinancing of maturity debt, the AOFM bond program could
approach $100bn in 2009-10.

The strategy of deficits

The 2009-10 Commonwealth Budget is shaping up as one of the most important
policy announcements of the last decade. The Government faces three major
challenges in framing this budget.

• The sharply deteriorating economic environment has taken a double-edged
sword to the government’s balance sheet. It has hit government revenues
hard and at the same time demands further fiscal stimulus to be delivered.
The size and shape of this ‘discretionary’ stimulus will be important in
shaping the depth and duration of the current recession. There will also be
distributional consequences (in terms of economic welfare) from current
policy decisions made.

• Of equal importance, the 2009-10 budget strategy is critical to protecting
the Commonwealth government’s AAA credit rating. The introduction of
Commonwealth government guarantees on State government and private
bank debt has highly concentrated the credit quality of the Australian
economy to the quality of the Commonwealth’s AAA rating. A sovereign
credit downgrade, or being placed on negative credit watch, would therefore
have significant ramifications across the broad Australian economy mainly
by putting upward pressure on term rates and potentially reducing the
attractiveness of Australian debt to foreign investors. To satisfy the ratings
agencies that the Australian Commonwealth is a genuine AAA credit a critical
element in this Budget will have to be a clear plan to get the government’s
finances back into balance over the medium term.

• This budget is particularly sensitive to the political cycle as it will set the
starting point for the Government’s pre-election 2010-11 budget (with the
next election due by 12 April 2011). Importantly, if the Government is
contemplating an early election, possibly later this year, then this Budget
will be a central platform.

The Government has two possible strategies to deal with these challenges.

• First, the Government can act aggressively to try and further limit the depth
and duration of the Australian recession by significantly increasing spending.
By doing so, the government would likely follow other global governments
by going into the biggest deficit since World War II, a move which could
directly threaten its AAA credit rating.

• Second, the government can show restraint and keep the budget deficit
close to the limits of Australia’s biggest post-war deficit experienced during
the 1990s recession.

We believe that with Australia’s AAA credit rating at risk and the political cycle
front of mind, the Government will adopt the second option and choose
restraint. Such restraint will not only entail relatively small budget deficits by
current international standards but will also require a credible exit strategy to
return the budget back into balance over a reasonable time period.

Already worse than the 1990s

In the last recession the Commonwealth budget deficit peaked at 4.1% of GDP
in 1992-93. We expect the Government will be unwilling to significantly exceed
this upper limit for the deficit in this recession. In today’s terms, a budget
deficit of 4.1% of GDP is equivalent to around $50bn. These ‘limits’ would
impose a significant constraint on funds available for discretionary expenditure,
given the severe damage to revenues from the deepening decline in Australian
growth.

It now looks like parameter variations (ie. changes in budget revenues and
expenses as a result of changes in economic forecasts) alone will drive a starting
point for the budget deficit that is worse than the 1990s recession experience.

We estimate parameter variations since UEFO in February will drag a cumulative
$50bn off the budget bottom line over the four years to 2008-09 to 2011-12

The biggest impact is likely to be in 2010-11 with parameter variations likely to
drag around $17.5bn off the government’s bottom line, pushing the deficit
(before any policy change) to around $53bn (4.5% of GDP). The impact in the
2009-10 budget year is almost as bad with parameter variations dragging the
deficit down to a new starting point (ie. before policy decisions) of around $53bn
(4.3% of GDP).

We assume the government will allow only minimal slippage in its balance sheet
relative to the 1990s experience and so will be unwilling to exceed a deficit of
5.0% of GDP. This significant hit to revenues from the current recession
therefore leaves the government scope for just an additional $15-20bn of
expenditure (net of savings) over four years from 2009-10. This is notably
smaller than the $42bn UEFO stimulus package in February but larger than the
$10.4bn stimulus package announced in October 2008. This cash shortfall
therefore means the Government will need to find meaningful cost savings over
the forward period to try to maximise the size and impact of any direct
stimulatory policy it intends to use to fight this recession. Cost-saving will also
be vital in prompting a speedy and credible return to budget surplus.

Overall, we now estimate the Government will run a cumulative underlying cash
deficit of around $220bn over the five years from 2008-09 to 2012-13. This will
entail deficits in excess of $50bn per year for the next two years, improving to
around $37bn by 2012-13. For political reasons, we suspect the biggest deficit
will occur in 2009-10, to peak at $57bn or 4.8% of GDP.


The impact to the economy of the budget is likely to be mildly stimulatory in
2009-10. This assessment is based on both the expected (positive) change in
the fiscal balance from year to year, as well as the increase in discretionary
policy measures. Our estimate is that discretionary spending measures are
worth around ¼ppt to (nominal) GDP per annum over the four years from (and
including) 2009-10.

Back to balance

To provide maximum protection to its AAA credit rating, the Government must
outline a credible strategy for returning the budget to surplus over a reasonable
time period. In large part, the Government will likely argue that most of the
deterioration in the deficit is cyclical (ie. due to a weaker economy) and thus
that a return to ‘normal’ economic conditions will allow automatic stabilisers to
work and ‘naturally’ return the budget to surplus.

This appears to be a largely, but not completely, credible strategy. Between the
2008-09 and the 2009-10 budget the Government’s balance sheet, on our
estimates, has deteriorated by around $260bn. Of this, around $180bn, or
70%, will be due to the weaker economy. The remaining $80bn, or 30%, will be
due to discretionary spending increases.

The question then becomes how many years would it take for cyclical
forces alone to return the budget to surplus? The Government has
committed to maintaining real growth in spending to 2% per annum until the
budget returns to surplus. This broadly equates to nominal spending growth of
around 4% per annum. If we assume nominal revenue growth averages around
6-7%, slightly above trend nominal GDP growth, then our simple estimates
suggest that it will take between 7 to 10 years from 2009-10 to return the
budget to surplus1. That is, we could be running budget deficits until 2020. This
contrasts with the 1990s experience when significant asset sales allowed the
budget to return to surplus within five years.

We estimate the time to return to surplus could only be reduced by one to two
years if, as has been reported, the Government assumes national economic
growth rebounds to above trend in 2011-12 (and possibly 2012-13) following
the recession. On a best case scenario, we estimate the time taken to ‘naturally’
return to deficit could be reduced to around 5 to 6 years if for example another
commodity price boom allowed revenue growth to exceed expenses growth by
2-3% per annum.

This sort of time frame should be enough to satisfy the credit ratings agencies.
The strong starting point for the Commonwealth’s balance sheet is critical, with
net debt below zero last year. But this doesn’t mean that government can or
should allow a lack of discipline to creep into the execution of fiscal policy.
Indeed, the onus will be on the government to outline a strategy to
actively reduce the structural deficit as well as the cyclical deficit over
the projection period. To do so, the government will need to (a) ensure all
permanent increases in spending announced in this budget (ie. pension
increases) are offset by permanent savings (ie. means-testing Family Tax
Benefit Part B) and (b) outline a further combination of permanent savings,
most likely through either deferring planned 2010 income tax cuts or broadening
current taxes or re-instating past tax rates.

Net debt to exceed 10% of GDP

Our estimates imply the Government’s net debt position could rise from the
UEFO estimate of 5.2% of GDP (around $70bn) in 2011-12 to, as a worse-case,
about 10% of GDP ($130bn). To be sure, this is still low by international
standards, but it would nevertheless be the highest level of net debt 1998-99.
It is the Commonwealth’s strong balance sheet which will be the greatest
defence against a ratings downgrade. Prior to the current economic and financial
crisis Australia’s net debt position was below zero. Even with the guarantee of
the banks and the potential for a broad guarantee of the States, the ratings
agencies appear comfortable that Australia is a genuine AAA credit.

As per usual, the Government will finance the projected budget deficits by
issuing Commonwealth Government Securities (CGS). Based on our estimates,
the total deterioration in the budget position will see the Government’s total
debt funding burden exceed $200bn by 2011-12 and may approach $250bn by
2012-13 (see Figure 3). Our analysis implies that the Government will have to
contain its additional debt burden to around $40bn over the projection period to
avoid lifting its legislated $200bn ceiling on debt issuance.

Parameter problems

The marked deterioration in the Australian economic outlook, which has
weakened markedly since the UEFO was published in February, will be the main
drag on the budget bottom line. The Government will now be forecasting GDP
to contract in 2009-10, with growth in 2010-11 likely to be well below the UEFO
projection of 3%. This will see the Government’s forecasts for nominal GDP, the
key driver of tax revenues, slashed by at least 1ppt per year over 2009-10 and
2010-11. Moreover, the Government’s employment forecasts, a key driver of
revenue (via income tax collections) and expenses (via unemployment benefits)
are also likely to have been cut substantially.

Changes to the methodology for forecasting economic parameters will also
significantly impact on the budget bottom line, resulting in a greater deficit in
2010-11 but a faster improvement in the budget balance in 2011-12 and 2012-
13. Estimates for 2010-11 will now be based on forecasts rather than
projections, resulting in a weaker estimate for growth and a larger budget
deficit. Estimates for 2011-12 and 2012-13 will still be based on projections,
although the government will now assume growth of 1-2% above trend, rather
than the previous approach of using trend growth, to account for the “recovery
phase” the economy will be in.

We have been deliberately conservative with our economic forecasts for these
purposes. This is despite the fact that our figures are less pessimistic than the
latest from the IMF (which had growth of -1.4% in calendar year 2009 and -
0.6% in calendar year 2010). Nevertheless, it is possible that the government’s
economic forecasts will be more optimistic than our current estimates, resulting
in smaller estimates for the budget deficit.



Discretionary spending and saving measures

The Prime Minister has confirmed a third spending package will be included in the
Budget. We estimate the package will be worth between $30bn and $35bn, offset
by savings of $10bn to $15bn.

Most spending will be concentrated on infrastructure spending (much of which will
likely be funded out of existing nation-building funds including the Building Australia Fund) and increases to transfer payments, particularly for pensioners and perhaps the unemployed and disabled.

Because these spending measures will have a permanent impact on the budget, this
will most likely be partly offset by permanent savings measures to minimise the
impact on the structural deficit. The most likely are cuts to “middle class” welfare
through imposing income limits on a number of benefits and amending (or
eliminating) the first home owners’ grant. Deferring planned income tax cuts from
July 2010 is also a possibility, which would add back $11bn to the budget
bottom line in 2009-10 alone.

The main spending initiatives are likely to be:

• Major infrastructure spending on road, rail, port, irrigation and recycling
infrastructure. 30 projects will reportedly receive funding and will include more
community and regional infrastructure funding. Funding will come from the
$10bn Building Australia Fund created in last year’s Budget.

• Increase in aged pension rate by at least $30 per week.

• Increase in unemployment and disability benefit rates.

• More support for small business to stem declines in business investment,
including a possible extension of the small business investment tax break.

• Implementation of paid parental leave, although this may not commence until
2010-11 at the earliest and could be phased in gradually.

• Increased spending on higher education, although this is likely to be delayed
until at least 2011.

Key savings measures are likely to be:

• Savings identified by the Razor Gang, such as reducing government spending
on consultants, creating government-wide contracts for buying products, cutting
back on travel and streamlining arrangements for leasing office space.

• Reducing “middle-class” welfare by reducing or implementing income limits
(most likely of $100,000 per year for individuals and $150,000 per year for
families). Areas to be targeted include:

• The Medicare Safety Net

• Family Tax Benefit Part B

• The Childcare Benefit

• The Private health insurance rebate of 30%. There may also be a cutback to
the range of “ancillary” items eligible for the rebate scheme.

• High income superannuation tax concessions. At present, individuals can
invest up to $150,000 of their pre-tax salary into superannuation and earn
significant tax breaks.

• Changes to (or abolition of) the first home owners’ grant to favour new building.

• Abolition of a loophole allowing hobby farms, holiday homes and lifestyle assets
which are listed as businesses for tax purposes to be claimed as tax deductions.

• Streamlining taxation on alcoholic beverages by removing anomalies in the way
different alcoholic drinks are taxed.

• Increase in tobacco tax.

Reuters compilation of budget stories/speculation

TAX/WELFARE

Single mothers to receive more relaxed welfare treatment in the budget as the government takes a softer line to confront rising unemployment and a revenue squeeze that will limit its ability to increase welfare payments.
(The Australian, May 1)

About 135,000 parents and young people will be stripped of welfare payments unless teenagers are in some form of education or training
(Sydney Morning Herald, May 1)

Parents will be stripped of family tax benefits payments if their dependent children are not studying or in training for work. Young people also will be required to either "earn or learn" in order to receive government assistance.
(The Advertiser, May 1)

More teenagers with disabilities are tipped to gain access to after-school care so their parents can work. Carers will also gain free entry to sporting events and concerts if they accompany a person with a disability.
(The Age, May 1)

The government is considering revamping its first-home owners grant in the budget to offset the cost of a new mandatory six-star energy efficiency building code, to be discussed by Prime Minister Kevin Rudd and state leaders in Hobart.
(Australian Financial Review, April 30)

The government's first-home buyers grant will survive the budget process, amid predictions it may not be continued, but in a changed form favouring new building.
(Daily Telegraph, April 24)

The government will not renege on legislated tax cuts for high-income earners on more than A$100,000 ($71,230) a year, due from July 1.
(The Australian, April 28)

A promised base pension rate increase could be wound back and action on paid parental leave, superannuation and the first homebuyer grant might be less generous or income tested. The government is examining means-testing health benefits including the uncapped Medicare safety net, curtailing access to baby bonus payments and family tax
benefits, and fully taxing superannuation fund contributions.
(The Age, April 28)

Government may look longer term at raising taxation for high-income earners.
(Prime Minister Kevin Rudd, Radio 3AW, April 24)

The rich to face higher private health costs and the loss of lucrative superannuation tax breaks under proposed budget reforms. The government wants to cut the cost of A$3.5 billion ($2.47 billion) in private health insurance rebates through a means test and scrapping ancillary items. (Herald Sun, April 23)

The budget to crack down on tax breaks used by the wealthy, including abolition of a loophole allowing hobby farms, holiday homes and lifestyle assets to be claimed as tax deductions.
(Daily Telegraph, April 22)

The government to unveil a third economic stimulus package in the budget, comprising major infrastructure spending on road and rail, irrigation infrastructure and recycling measures. The package will likely not include more cash
handouts.
(Australian Financial Review, April 22)

The budget to release A$550 million ($391 million) for community and regional infrastructure projects costing up to A$2 million each, plus spending on 30 major projects including road links, urban transport and ports.
(Daily Telegraph, April 22)

The government to use the budget to offer more support for the nation's 2 million small businesses to stem decline in corporate investment.
(Australian Financial Review, April 2)

The government to streamline taxation of alcoholic beverages. Options include removal of concessional excise on draught beer, reaping A$690 million ($479 million) over four years, and abolition of the wine equalisation tax rebate
for producers, forecast to cost A$1.13 billion over four years.
(The West Australian, April 2)

The government is expected to issue long-term investment bonds, with returns linked to inflation, to help self-funded retirees sustain their finances in retirement.
(The Australian, April 1)

Welfare payments, including pensions for the rich, childcare and health subsidies, and a A$5,000 ($3,400) bonus payment for parents of new babies, may be cut in the May budget. (Australian Financial Review, March 31).

Budget 2009: Stability, security & recovery

May 4 2009 4
Australia is set to announce a A$30 weekly pension increase in the May budget, but pare back health care refunds and government contributions to pension plans for the rich. (Herald Sun, March 12)

ARTS

Budget to fund a dedicated children's channel on state broadcaster ABC at a cost of A$20 million.(The Australian, April 23)

HEALTH

The cost of having a baby will rise by up to A$2,000 under a crackdown on the Medicare Safety Net, which refunds 80 percent of a patient's medical bills once they spend more than A$555 out of their own pocket, or A$1,111 for wealthy
families.
(Sydney's Daily Telegraph, April 1)

ECONOMY

Australia's coming budget to forecast a near 50 percent jump in unemployment to one million people next year and a 0.5 percent contraction in the economy over 2009-10.
(The Australian, May 1)

The budget faces a A$50 billion revenue shortfall next year and a deficit as large as A$70 billion, with a A$200 billion fall in revenue forecast for the next four years, up from February's forecast of A$115 billion, and with unemployment
to top 8 percent.
(Australian Financial Review, May 1)

Government banking on a rapid recovery from recession within two years to get the budget back towards balance,repay the national debt and cut unemployment. The recovery scenario will have the economy bouncing back to
above-average growth rates, close to 4 percent, at the end of the recession. The budget to provide forecasts for both 2009-10 and 2010-11.
(The Australian, April 28)

Budget deficit to top A$50 billion ($35 billion) in 2009/10 and $60 billion the year after. Analysts forecasting debt levels of A$300 billion, breaking the self-imposed A$200 billion limit on borrowings.
(The Australian, April 24)

The government will release long-term revenue and spending projections beyond the usual four years in an effort to underline its commitment to return to a surplus after what will be record deficits for the next few years.
(Australian Financial Review, April 24)

Budget deficit to be largest in Australian history, exceeding the old accumulative forecast of A$200 billion.(Daily Telegraph, April 22)

The government is preparing a budget built on assumptions of a deep recession, with official forecasts expected to predict the economy to contract by at least 1 percent next year.
(Australian Financial Review, March 30).

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