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Budget Monitor: Surplus – so near, yet so far


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7 November 2011: With the Federal Treasurer to release updated Budget forecasts in the near future, Deloitte Access Economics has released its second and final Budget Monitor for calendar year 2011.

According to Deloitte Access Economics Partner Chris Richardson: “Recent economic developments will tell the Treasurer that the dream is over – that the 2012-13 surplus has slipped back into deficit,” he said.

“But the politics of that announcement are horrendous, with a fired up Opposition no doubt set to remind the public that no Labor Government has run a surplus since 1989-90.”

So will the Treasurer opt for good economics on decision day?

“Will he tell the public that fading global prospects and weak markets here at home have delayed the return to surplus – possibly not for one but for two further years until 2014-15?” Chris Richardson said.

“Or will he go for it, deciding the looming 2012-13 deficit is small enough – at $1.9 billion, it’s less than the price of 200 Kardashian weddings – that he should tighten policy despite rising economic risks?

“Don’t get us wrong. We think the Australian Budget is in worse shape than people realise, and that it needs a fair amount of repair to stand up to the pressures from rising health care costs and an ageing population in coming decades.

“That’s why we’ve encouraged all governments over the past decade to fight a better fight: there’s a need to watch industry welfare, which is set to be boosted in the carbon tax package, and middle class welfare, wwhere the last Budget made some progress, but only made a small dent in a big cost.

“Plus there’s a need to plug holes in the tax system, including via indexing petrol taxes and winding back super tax concessions for high income earners that won’t help save much on pension costs.

“Yet for 2012-13 at least, we’d counsel caution. As we’ve said all along, a surplus next year was a line in the sand drawn by the politicians, not by the economists.”

Highlights of the Budget Monitor include:

  • Economic Backdrop
    Despite the despairing headlines of recent months, Deloitte Access Economics’ forecasts for Australia are little changed. In fact the projected pace of growth in nominal GDP – the size of the economic pie – is at almost exactly the same rates that Treasury had in the May Budget papers. Yet though the Australian forecasts haven’t changed much, the risks to them have. Not only are the forecasts for the world weaker, the potential downside to them is now much bigger, as there’s a chance the ticking time bomb of Europe’s financial markets could explode.
  • Revenue Outlook
    Recent developments in the economy have still hurt the Budget. There is genuine weakness in jobs, and the upswing in profits has stumbled of late. So too have sharemarkets and housing prices. Deloitte Access Economics sees a shortfall against Treasury’s Budget revenue forecast of $5.0 billion in 2011-12, with 99% of that shortfall coming in company tax.
  • Spending and the Budget Bottom Line
    The Budget bottom line news is quite bad for the current year and remains bad for 2012-13. Deloitte Access Economics projects a cash underlying deficit of some $31.2 billion in 2011-12 (and a fiscal deficit of some $28.9 billion in that year). These estimates are both $8.6 billion worse than matching official estimates, and also mean this year’s deficit looks like ticking over the $30 billion mark.
    In the absence of further policy changes, 2012-13’s hoped for surplus is expected to turn into a cash underlying deficit of $1.9 billion (and a fiscal deficit of $1.5 billion in that year). That is $5.4 billion shy of the last set of forecasts from Treasury.

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