Economic Insights

Economics
July 14 2010

Government tweaks budget forecasts

Revised budget forecasts
  The Federal budget is tipped to be back in surplus in three years. The Federal Government has re-stated
its commitment to return the budget to surplus in 2012/13.
What does it all mean?
• It’s encouraging that the Government has re-stated its commitment of returning the budget to surplus. But the key
point is that the expected surplus is still three years away. Clearly a lot will go wrong and a lot will go right over
that time. No-one should spend more than five minutes analysing the new long-term forecasts. Simply, they are
just forecasts – the best guesses of events some way off.
• Of more interest is the fact that the government has tweaked the economic growth forecast for the next year,
slicing it from 3.25 per cent to 3.00 per cent. (“Normal” growth is estimated at 3.25 per cent). The actual change is
neither here nor there, but it does suggest that Treasury is wary about how European and North American
economies are travelling. And at the same time, inflation is seen at 2.75 per cent this year rather than 2.50 per
cent. That change just brings Treasury into line with the Reserve Bank and confirms that rate hikes are more
likely over the next year than rate cuts.
• Treasury expects that the budget deficit for the 2009/10 year just past will be $55 billion (4.2 per cent of GDP). In
the year to April, the deficit stood at $47.7 billion, so it may already be too pessimistic. This year the deficit is
tipped to fall to $40.4 billion (2.8 per cent of GDP), then to a deficit of $10 billion in the next year (0.7 per cent of
GDP) and a budget surplus of $3.1 billion (0.2 per cent of GDP) is tipped for the 2012/13 year. Again, the
commitment is good, but we know a lot will change over time.
• The Government expects the Mineral Resource Rent Tax to provide $4 billion in revenue in 2012/13 and then
provide $6.5 billion in revenue the following year. We can all provide our views on whether this will be achieved,
but given that is three years away, and is a new tax, then Treasury’s estimates should be taken as given.
• Economic forecasts have been tweaked over the next three years. Still, given that a year ago Treasury said
unemployment would hit 8.5 per cent and instead it hit 5.8 per cent, there is little point arguing about the small
quarter percent variations to growth forecasts. In fact Treasury is sticking with its unemployment estimate of 4.75
per cent in 2011/12 despite the fact the jobless stands at 5.1 per cent and appears set to fall further in the short
term.
• More important is the big picture story. Australia’s budget deficit is low by global standards, our economy didn’t go
into recession and is still growing, and Australia’s debt
levels are the envy of advanced countries across the
globe. The government now expects net debt to peak at
6 per cent of GDP next financial year. Other economies
are fretting about debt levels of the order of 50-100 per
cent of GDP with some countries actually coping with
levels even above this range.
• Both sides of politics are fiscal conservatives, and that
holds the country in good standing. The hope is that
minor parties can also give the same commitment on
fiscal policy, especially with current polling suggesting a
tight election result.

Craig James – Chief Economist (Author)

(612) 9312 0265 (work)

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