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MYEFO: Swan cuts to save the thinnest of surpluses

The government has unveiled a net $7 billion worth of spending cuts to shore up its budget and honour its commitment to surplus in 2012-13 in the face of lower revenue from an economy affected by deteriorating global conditions.

The government’s Mid-Year Economic and Fiscal Outlook reveals a big blowout in the deficit for the current financial year of $15 billion, reflecting a revenue fall of $4.8 billion and additional spending in response to the Queensland floods, as well as the bringing-forward of expenditure from 2012-13 in order to secure what will be the tiniest of surpluses, $1.5 billion. This year’s deficit is now expected to be over $37 billion.

Economic growth has been revised down to 3.25% in 2011-12 and 2012-13. In May, the budget forecast 4% and 3.75%. Unemployment has been revised significantly upward — up 0.75% to 5.5% this year (reflecting current levels) and up 1% next year to 5.5%, which will feed into lower wage growth.

But inflation has been revised down 0.5 points this year to 2.25% and up 0.25 points next year to 3.25%. Terms of trade are expected to improve by 1.75% this year, rather than fall by 0.25%, but will fall further next year, by 5.25% rather than 3% as forecast in the budget.

The underlying story of the revisions, though, is a $20 billion collapse in revenue over the forward estimates because of lower growth. In response, the government has assembled savings of $11.5 billion, offset by new spending announced as part of the carbon pricing package. The net savings of $6.8 billion include:

  • $680 million over four years from the foreshadowed crackdown on living-away-from-home allowance, aimed at ending what the government calls rorting by foreign workers.
  • $370 million over four years from adjustments to the Dependent Spouse Tax Offset.
  • $2.1 billion from the deferral of several tax reforms by one year, including the introduction of a standard work-related expenses deduction.
  • $1.5 billion from a “one-off” additional efficiency dividend on the public service of 2.5% in 2012-13, ostensibly aimed at reducing use of contractors, cutting travel, reducing advertising and overhauling training. Some small agencies will be exempt, including the national cultural institutions, courts, ATSI bodies and ACMA.
  • $1.1 billion from changes to superannuation contributions.
  • $320 million from ending indexation of the baby bonus.
  • $613 million from increases in immigration visa fees.

The savings, however, won’t retrieve this year’s budget for the government. This time last year, 2011-12 was expected to see a deficit of $12.1 billion. In the intervening 12 months, that has tripled. The fall in revenue has been a major factor, but much of this year’s deficit is the result of moving 2012-13 expenditure into this year to preserve the surplus.

It’s a pea-and-thimble trick. A deficit is a deficit, whether it’s this year or next.

10
  • 1
    Jim Reiher
    Posted Tuesday, 29 November 2011 at 1:42 pm | Permalink

    What never ceases to amaze me is the starting assumption that so many just believe: that we need to have surpluses.

    So long as the debt one has is manageable, then there is no problem with debt. Can you imagine any household in the country not doing things that get them into debt? Any business? But if that household or business can pay the repayments and get the debt down over time, all is well.

    Once again our politicians are playing to the popular mythology: this time it is “debt is bad and we must have a surplus”.

    So play the pea-and-thimble trick… big deal. I dont mind us not having a surplus. In fact, if we can pay the debt, if our capacity to repay is there, then really…. what a lot of hot air.

  • 2
    Whistleblower
    Posted Tuesday, 29 November 2011 at 1:43 pm | Permalink

    If the government has brought forward expenditure to preserve the 2012/13surplus the key indicator will be the amount of government borrowing necessary to prop up its programs compared to forecast. Increasing expenditure this year financed by borrowing to give the appearance of a surplus in the following year would be a true pea and thimble trick.

    Whilst believers in the Magic pudding think you can go on borrowing indefinitely, the current situation in Europe and the US shows that this is not the case.

    One must commend the government if it is finally coming to the realisation that its expenditure programs in the long run must fit within the taxation levels that the country is prepared to tolerate even if it does indulge in chicanery to present an illusion.

  • 3
    dfgdgdf
    Posted Tuesday, 29 November 2011 at 1:53 pm | Permalink

    End the baby bonus completely.

  • 4
    mikeb
    Posted Tuesday, 29 November 2011 at 2:23 pm | Permalink

    @Jim is correct. There is nothing inherently wrong with a deficit, and conversely a surplus is not the Holy Grail. You have to spend money to make money – the trick being to spend wisely. Baby bonus is an example of unwise spending, whereas the NBN is something that the country will be reaping rewards on for many decades to come. It’s a pity that Swan & the government have been sucked into the coalition’s dogma.

  • 5
    shepherdmarilyn
    Posted Tuesday, 29 November 2011 at 2:26 pm | Permalink

    It’s funny how governments encourage debt for housing but hate debt for services.

    I note that DIAC has not had it’s prison budget slashed.

  • 6
    david
    Posted Tuesday, 29 November 2011 at 3:14 pm | Permalink

    How refreshing to see a Treasurer and Govt telling it like it is, as opposed to an Opposition led by liars in their leadership and economy areas (amongst many others) who have misled the country regarding an 11 billion dollar black hole pre election 2010 and a massive 39 billion black hole in current spending to support ridiculous, sort of, policy. To see the 3 stooges, Abbott, Hockey and Robb give a press conference in front of 3 light weight inexperienced journalists on an economical heavyweight budget was not only laughable it showed how these 3 are totally ill equipped to handle serious questioning and to cope with today’s economic situation.
    There contribution today, same old same old, pink batts, school buildings, NBN, carbon pricing…yesterdays men living in their idol Howards past.
    To listen to Abbott proclaim the 3 x triple AAA ratings were down to Howard and Costello is beyond funny, it’s pathetic.

  • 7
    Jim Reiher
    Posted Tuesday, 29 November 2011 at 5:23 pm | Permalink

    Indeed David, if they were right, then Mr Costello should have got that “best treasurer award” a little while back, not Mr Swan!

  • 8
    Dogs breakfast
    Posted Tuesday, 29 November 2011 at 6:02 pm | Permalink

    Politically they could have used this as an excuse to get rid of some dreadful decisions of past and present governments, and done in on the basis of tightening of the belts, ‘we’re all in this togethr’ Jim Hacker type pronouncements.

    Baby bonus, flick that, negative gearing beyond the actual income of the so called investment, gone.

    No income tax for superannuants earning less than a gazillion dollars - gone.

    This government is still politically bereft. Jaysus, everybody now recognisses what a crock the baby bonus is.

    So much low hanging fruit, so little courage.

  • 9
    Hugh (Charlie) McColl
    Posted Wednesday, 30 November 2011 at 11:50 am | Permalink

    Jim Reiher, your starting assumption is that the surplus is about economics. I don’t think it is. This surplus, for this government, is about delivering on a critical political undertaking. If they can nail the surplus by cutting government spending and still avoid a recession, Julia Gillard will deserve to get re-elected. The low hanging fruit can wait.

  • 10
    Jim Reiher
    Posted Wednesday, 30 November 2011 at 12:19 pm | Permalink

    Hugh - you raise a good point. It probably is more about keeping her promise, in that area, than purely about economics. Mind you, if the world does fall into another GFC, I would rather she deferred keeping her promise and help keep us out of recession, than “keep it at any cost”.

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