The centerpiece of Wayne Swan’s third budget is the projection of a $1 billion surplus in 2012-13 — three years earlier than predicted a year ago, but without the resources super profits tax it would have been only one year later, in 2014-15.
That billion-dollar surplus will now become the central pillar of Kevin Rudd’s re-election strategy. There’s not a lot of wriggle room for election promises without shoving the 2012-13 budget back into deficit and pushing the surplus back by a year, but Tony Abbott is in the same boat.
The budget handed down today is all about harvesting Australia’s astounding ability to dodge the GFC bullet and avoid last year’s developed world recession, which the government wrongly predicted Australia would suffer.
An amazing $95 billion more tax revenue will cascade into the ATO over the next four years than budgeted a year ago, mostly because of the resources boom. On top of that Swan has booked another $12 billion from the RSPT that he announced nine days ago.
The Treasurer says the surplus is three years ahead of “schedule” — but there was no schedule, only wildly incorrect forecasts. Last year’s forecast of a $28.2 billion deficit in 2012-13 is now forecast to be $30 billion out because Treasury thought there’d be a recession and that nominal GDP would shrink 1.5% in 2009-10.
It didn’t; in fact nominal GDP is now expected to grow 3% this year — a 4.5% turnaround in 12 months.
Even more astonishing, nominal GDP is now forecast to grow 8.7% in the next financial year –5% more than predicted a year ago and 3.1% more than Treasury thought just six months ago.
Those two numbers — 4.5 and 8.7 — are the twin pillars of today’s budget, because they are the only two years for which Treasury has upped its growth forecasts. The new GDP growth forecasts for 2011-12 and 2012-13 are actually BELOW those in last year’s budget, by 0.4% and 0.57% respectively.
The difference is that the expected growth in GDP in those years — 5.8% and 5.5% — will be on a base that is almost 10% larger than expected (5% on top of 4.5%).
So two years of astonishing economic out-performance has brought forward the budget surplus by three years. And if it hadn’t been for the Coalition coup late last year that made Tony Abbott opposition leader and meant the emissions trading scheme had to be deferred, there would have been quite a sizeable surplus in 2012-13, rather than the bare $1 billion in today’s budget.
That deferral of the CPRS has cost the budget $15.3 billion over three years between 2011 and 2014 and it meant that even with Australia’s incredible economic turnaround last year, the surplus could only have been brought forward one year — not enough on which to base a winning election campaign.
But then just days after Tony Abbott became opposition leader and the CPRS was effectively killed, Ken Henry delivered to the government a solution: his Future Tax System Review contained the proposal for a 40% resources rent tax on the miners.
That tax delivers $12 billion over the forward estimates, including $3 billion in 2012-13, the crucial year.
There’s also $1.3 billion from the higher tobacco excise. It means the net loss to the 2012-13 budget from the missing CPRS is just $2.3 billion, which sneaks it into surplus by just $1 billion.
In effect, smokers are paying for Swan’s return to surplus.
So, are the new economic forecasts that deliver this astounding budget turnaround credible? After all, US growth is predicted to go backwards in 2011, from between 3% and 2.5%, while Europe is mired at 1.25%.
Well, in the next financial year, when Australia’s nominal GDP growth (which is what delivers growth in tax receipts) is forecast to grow a mind-blowing 8.7%, real GDP growth is only predicted to grow 3.25%.
The difference is the GDP deflator, or prices — forecast to be more than 5%. That’s not equivalent to the CPI inflation rate because it includes net export prices, or the terms of trade.
In other words the entire difference between the economic growth rate for 2010-11 predicted a year ago (3.75%) and that predicted today (8.7%) is export prices – the resources boom.
For the current financial year put the difference down to the fiscal and monetary stimulus, because the deflator is about the same as forecast a year ago — 1%.
So the first year of Australia’s two-year spurt is due to the stimulus and the second year to the return of the resources boom, in turn due to the rebound of China.
But remember that these are all just forecasts, and as this budget makes crystal clear, things can turn out to be very different to what you think.