Monday, December 10, 2012

Deficits loom for next two years

We have predicted a slowing in commodity process over a year ago. Aivars Lode

Federal government modelling ­suggests that the bigger than expected fall in commodity export prices will produce a multibillion-dollar budget hole that could keep it in deficit over the next two years.
The Business Council of Australia yesterday called on Labor to spell out a medium-term strategy to get the budget firmly back into the black amid signals that the government is prepared to dump its promise to deliver a small surplus this year.
The federal Treasury modelling suggests this year’s projected $1.1 billion surplus could turn into a $4.5 billion deficit, while next year’s projected $2.8 billion surplus could end up $11 billion in the red if the latest unexpected slowdown in nominal gross domestic product growth persists.
The Australian Financial Review reported on Friday that the government would dump its long-held commitment to a budget surplus this financial year if economic growth slipped below the trend rate of growth, considered to be about 3 per cent growth in real GDP.
Business Council of Australia chairman Tony Shepherd called on the government to “have a clear plan on how to return to surplus, not based on the optimistic forecast but based on a realistic forecast”.
The recent weakness in the terms of trade was putting company profits and taxation revenues under pressure. “We all wish the economy to grow at trend. But you have to prepare for the contingency that it will be below trend, and one would have to be ­concerned at the moment that it won’t.”
Mr Shepherd said the business ­community would forgive the government if it failed to achieve its long-anticipated first surplus since coming to power next May, provided it had a well articulated medium-term strategy.
“If we can see the discipline and a strategy that is workable then [a def­icit] would be acceptable to business. A goal of a surplus is a worthy one, but you have got to have a plan on how to get there,” he said.
The government would need to look at restoring its revenue base and adopting a disciplined set of rules on spending through the cycle, such as headcount targets on government and limiting government as a percentage of the economy to 23.7 per cent, he said.
It would also need to lay out a plan over the medium-term cycle of 10 to 12 years to return the economy to surplus on a sustainable basis, and pay down debt and build reserves.
Mr Shepherd also called on the opposition to commit to a set of rules. But shadow Treasurer Joe Hockey ­yesterday said the Coalition would ­outline its rules once it was elected because he did not believe the current fiscal position being presented by Treasurer Wayne Swan.
“The fact is they are engaged in deceit and we don’t know what the starting position is,” Mr Hockey said.
The government was “crab walking away from the surplus so they can do what they do best”, he said.
“Once the shackles of any surplus are off, Labor will engage in reckless spending, especially given their $120 billion of unfunded promises,” Mr Hockey said.
The government is relying on nominal growth of 4 per cent in order to raise enough taxation revenues to meet its $1.1 billion surplus in 2012-13 contained in the Mid-Year Economic and Fiscal Outlook.
But last week Mr Swan blamed a “savage reduction” in commodity prices leading to nominal income running growing at 0.5 per cent in the quarter or an annual pace of just 1.9 per cent in the September quarter, according to the Australian Bureau of Statistics national accounts.
A commodity price index calculated by the Reserve Bank of Australia points to further falls in prices this quarter, down between 3.5 and 4.8 per cent in the first two months of current quarter.
A scenario produced by Treasury in the MYEFO statement predicted a one percentage point fall from the ­government’s forecast of 4 per cent nominal growth this year would weaken the budget bottom line by $2.8 billion this year and about $6.7 billion in 2013-14.
Mr Swan has wound back his rhetoric on the surplus as commodity prices have fallen making it conditional on jobs.
“While weaker revenues will make it more difficult, we’re committed to returning the budget to surplus in 2012-13,” Mr Swan said last week.
“As I’ve said before, we’ll always ensure our budget is appropriate for the economy and jobs and these figures don’t change our consistent approach.”
But in the May budget, the Treasurer said the surplus was vital for the strength of the economy.
“Returning to surplus also locks in confidence, and is Australia’s best defence at a time when the global economy is changing dramatically,” he said in May.
“It creates a buffer in uncertain times and is a very clear sign of our strong economy.”
Minister for Regional Development Simon Crean said the budget surplus was still achievable.
“We are committed to the budget surplus and I still believe we can get there,” he said from the Southern Chinese city of Guangzhou.
“What we put out in the mid year economic forecasts shows the surplus is still achievable.”

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