Treasurer Wayne Swan refused to rule out a brief recession in coming months in releasing Treasury’s Mid-Year Economic Forecasts this morning, and Australia faces three years of tepid growth, higher unemployment and minimal budget surpluses, with lingering inflation.
Treasury forecasts real GDP growth to be 2% this year (down from 2.75% in May) and 2.25% 2009-10. Unemployment will rise to 5% (up from 4.75% in May) and go up further in 2009-10 to 5.75%. The CPI will rise further than forecast in May, to 3.5% this year, falling back to the top of the Reserve Bank’s target, 3%, in 2009-10.
As a consequence of the looming slowdown and the economic stimulus package last month, the budget forecast has been slashed to $5.4b this year and $3.6b in 2009-10. The financial crisis, according to Swan, had blown a $40b hole in government revenue across the four years of Forward Estimates. The biggest casualties of the slowdown in government revenue will be company tax and capital gains tax receipts, and Swan declined to rule out deficits if the international situation became worse.
This was Wayne Swan’s weakest performance, harking back to the early days of the Government as he parried media questions about the detail of the Treasury forecasts. While he emphasised that growth would remain positive on an annual basis, he refused to answer repeated questions about whether quarterly growth would dip into negative territory.
Swan also rejected suggestions the figures were being dumped on a day given over to US election news, saying they couldn’t have been released earlier in the week due to the Melbourne Cup and that he was flying out to a G20 meeting tomorrow. Pressed on the CPI figures, he had to go searching through his own copy of the statement to find them, thumbing through a book for an embarrassingly extended period mid-press conference.
It wasn’t a John Kerin performance but it was hardly that of a steady hand on the economic tiller.
Swan also had difficulty making clear the Government’s fiscal strategy in response to the massive drop in forecast revenue. He confirmed that pensions would still be increased in next year’s budget, but that everything else that wasn’t an election commitment was up for reconsideration, including infrastructure funding and payments to the states. The next COAG meeting is unlikely to the outbreak of Commonwealth-State bonhomie that previous meetings under Rudd have been.
The biggest casualty of the $40b drop in revenue will be infrastructure funding. That $40b is the guts of the Government’s long-term infrastructure investment. Only $26b is currently set aside from previous budgets for investment, and the slightest deterioration in the overseas outlook — what price that? — will mean nothing further will be available until late in Rudd’s second term.
Assuming the slowdown doesn’t claim the Government in 2010.
The Press Gallery has been given access to Treasury officials this afternoon for background briefing. The big issue officials will be pressed on is quarterly GDP growth. Given the Government chose Obama Day to release the figures, don’t rule out the revelation that growth will turn negative at some point soon.