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Budget Monitor


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There are three big forces in play for this Budget – economics, politics and policy rules.

To understand the Budget backdrop, you have to understand what’s happening on all three fronts.

To the economics first. The last time the world was paying Australia this handsomely for our exports, Bismarck was still trying to unify Germany into one country, and Japan had only just opened itself to trading with the world after centuries of isolation. That means the rivers of gold are in full flood: thanks to fast growth in China and India, our national income is climbing fast, and unemployment rates have already dropped back below 5%.

Those aren’t once in a lifetime factors. As the above chart suggests, they’re probably not even once in a century factors. And they are downright beautiful as a backdrop for the Federal Budget.

Or they would be if we hadn’t had the hiccup of the global financial crisis. Although the latter was not a drama for our economy, its impact on the Budget was exactly that – dramatic. That whipsaw you see near the end of the above chart meant that, for a handful of months during the GFC, national income plunged as profits fell back at the fastest rate seen since the 1960s. Companies lost money, capital gains evaporated, and both those factors – the losses that business racked up and reduced capital gains – have had a lingering Budget impact.

That’s why the Federal deficit is failing to improve. Indeed as the following chart shows, running 12 month totals for the deficit are still almost as bad as they were during the worst of the crisis, and there is as yet little or no sign of any improvement in the numbers. At $56 billion in the red in the year to February, that’s well shy of where this year is budgeted to end (at $41 billion), and there’s a massive gap between current figures and where the deficit is projected to be in the financial year just about to start (2011-12, at $12 billion).

And therein lies the conundrum posed by the economic backdrop of this Budget.

The negatives for revenues out of the global financial crisis are lingering longer than expected, while the cost to spending of floods and cyclones suggest fiscal recovery will be even slower to arrive. That means Budget night has to tell bad news stories about the year just ending and the year just about to start.

 

Please download the full media release below.

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