Fed:Swan faces a difficult balancing act

AAP General News (Australia)
04-16-2010
Fed:Swan faces a difficult balancing act

By Colin Brinsden, Economics Correspondent

CANBERRA, April 16 AAP - Federal government ministers can try to douse expectations
for a much improved budget bottom line as much as they like, but market economists are
convinced it is on the cards.

Or at least it should be.

Treasurer Wayne Swan faces a difficult juggling act as he bunkers down in the Department
of Treasury over the next few weeks in preparation of the May 11 budget.

On the one hand he has to be seen to be making inroads into returning the budget back
to surplus, but at the same time the budget has to be politically palatable with an election
fast approaching.

Still, there are a growing number of voters who want the government to take a tough
stance on spending.

This week's Essential Research online survey found nearly a third of respondents wanting
spending cuts to ease the debt burden.

And you would think this would be an aim of the government to at least take the spotlight
off its school building and insulation programs that have suffered so much bad press.

Business, too, wants the surplus restored as soon as possible through cuts to the budget,
rather than increasing taxes.

The Australian Chamber of Commerce and Industry (ACCI) in its 2010-11 budget submission
said Australia was able to deal with the impact of the global financial crisis due to
the stimulus measures implemented by government.

"However, the scope and effectiveness of these fiscal measures was made possible by
past fiscal discipline and the elimination of public debt," ACCI chief executive Peter
Anderson says.

That said, ACCI - not always a bedfellow of the Labor party - has been keen for outstanding
stimulus measures into infrastructure to go ahead, unlike the federal opposition.

Economists say it is also critical for homeowners and borrowers generally that the
budget is seen taking pressure off interest rates.

Macquarie Research, which has been leading the charge in expecting a much improved
budget outlook, said financial markets weren't too worried about the amount of Australian
government debt.

"It's more what the implications for the Reserve bank would be," Macquarie senior economist
Brain Redican said.

Financial markets will be watching the detail of the budget closely.

It will put the government's so-called "economic conservatism" to the test.

"This is supposed to be the beginning of the consolidation phase, so it would be inappropriate
to then spend more at this stage of the cycle," Nomura Australia chief economist Stephen
Roberts says.

He said the clawback in expenditure had to be in the near term, rather than in the
out years, "because that's where the interest rate pressure is".

The government has pledged to cut spending by two per cent per annum to get the surplus
back to surplus by 2015/16.

Such restraints will mean the government won't have a huge amount of money to chuck
about in its final budget before the election, nor will it have a bucket of cash to throw
around in the election campaign itself.

Still, the government can promote the third and final leg of its tax cuts that are
due on July 1 that were announced in its first 2008/09 budget - so voters won't be totally
empty handed going the polling booth.

But Treasurer Wayne Swan has been adamant that we shouldn't expect a huge improvement
in the budget bottom line in the near term.

"It's important to keep in mind that the weaker (profit) outcomes we saw during the
global recession will continue to act as a drag on government revenues for some time to
come," Mr Swan in one of his recent weekly economic notes.

While there has also been a rebound in the share prices, these are a third lower than
its pre-crisis peak, which will negatively impact capital gains tax.

And even with the government's stimulus keeping an extra 200,000 Australians in work,
the global recession still saw a significant jump in the number of unemployed and a fall
in hours worked.

Economists are equally adamant that there will be disappointment if the benefits of
a much improved economic backdrop are not seen to be flowing through to the bottom line.

The economy has markedly outperformed forecasts Mid-Year Economics and Fiscal Outlook
(MYEFO) just a few months ago, notably in the jobs market.

The unemployment rate has stabilised around 5.3 per cent after peaking at 5.8 per cent
last year, when Treasury had forecast the rate peaking at 6.75 per cent by June this year.

Company profits are pulling out of a slump, led by resource companies that continue
to enjoy the benefit of strong Asian demand, particularly China.

All of this should mean a greater amount of government revenue than predicted just
a few months ago, and this should see an improvement in the budget bottom line.

An improved starting point - in this case the 2009/10 financial year - will flow through
to future years, and in theory bring the budget back to surplus earlier than the forecasts
2015/16.

Macquarie's Mr Redican says there is "a grain of truth" in Mr Swan's statements, although
he believes the lag between company profits and company tax has been somewhat exaggerated.

Nomura's Mr Roberts expects a $44 billion deficit for the 2009/10 financial year, instead
of $57.7 billion shortfall as forecast in MYEFO.

This should help bring the deficit down to just over $30 billion in 2010/11 compared
with a predicted $46.6 billion.

And "as day follows night" it should mean the budget is returned to surplus earlier
than forecast, he says.

He also believes the government will be picking up "a fair bit" of personal tax and
capital gains tax relative to where the government forecast and despite what Mr Swan says.

"Equally on the expenditure side, the payments for social security and welfare are
going to be much more contained by the economic outlook we have now," he said.

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