Nov 9, 2010

Everything’s up, except the deficit — and housing

Today's Mid-Year Economic Forecast (MYEFO) shows an appreciable acceleration in economic growth this year, but as expected the higher dollar has hit government revenue.

Bernard Keane — Politics editor

Bernard Keane

Politics editor

The economy will grow faster this year than forecast even in July, driving unemployment lower and inflation higher, according to today's Mid-Year Economic Forecast released by Treasurer Wayne Swan. However, the stronger dollar has knocked more than $8b off revenue projections for the next four years, as part of an overall revenue fall of $9.7b, including a $3.1b reduction in revenue from the early stages of the MRRT. Treasury has upgraded Australia's expected GDP growth in 2010-11 from 3% in July to 3.25%, with unemployment forecast to fall further to 4.75%, rather than 5% forecast in the Pre-Election Economic and Fiscal Forecast, and falls further to 4.5% in 2011-12. Forecasts and projects for 2011-12 and the subsequent two years remain the same, but inflation is expected to rise to 3% in 2011-12, rather than the previously forecast 2.75% ("the risks are on the upside," Treasury remarks in the document). Despite the fall in unemployment, however, Treasury forecasts the wage price index to grow at the same rate as previously forecast, 3.75% this year and 4% next. The impact on revenue means an $800m rise in this year's Budget deficit to $41.5b, a $1.9b rise in 2011-12, a small fall in the forecast surplus in 2012-13 from $3.5b to $3.1b, and another fall in 2013-14 to $3.3b. The higher growth will be sourced almost entirely from our terms of trade: MYEFO forecasts yet another weakening of construction activity, further downgrading the Budget forecast of private dwelling investment from 7.5% this year to 4.5% (in 2009, it had been forecast to hit 11.5%) and another fall from 4% growth in 2011-12 to 3%. Treasury tries to put a positive gloss on the dwelling figures, noting:
The number of finance commitments for the construction of new dwellings is down nearly 28 per cent through the year, while trend growth in building approvals has fallen in each of the past six months. Nonetheless, the outlook is for dwelling investment to continue growing, consistent with interest rates currently at around neutral levels, a positive employment outlook and a pipeline of construction activity arising from the strength of population growth in recent years.
Unlike construction, however, total business investment is forecast to grow even more strongly, however, from a Budget forecast of 7% to 8% this year. The mooted spending cuts floated in the media haven't materialised, with the Government only adding relatively small cuts to the savings outlined in its election commitments, but remaining well within its self-imposed 2% real spending growth target. Public spending is forecast to grow 1.5% this year, fall by 1.1% next year (driven by the end of stimulus programs), and grow 1% in 2012-13 and 1.6% the following year.

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18 thoughts on “Everything’s up, except the deficit — and housing

  1. freecountry

    When did Treasury start playing these sort of games with spin?

    Construction finance commitments down 28 per cent, but dwelling investment forecast to rise … That means either construction shifting from debt-financed to cash-financed–I don’t think so–or the investors gaining an increasing share of the homes that already exist right now. That is to say, a transfer of homes from owner-occupiers to investors.

    Treasury refers to this process as “dwelling investment to continue growing”. Could Ken Henry please explain how a net transfer of secondhand assets from one group to another is defined as “growing”?

  2. Jimmy

    Or maybe the expect that after slumping 28% there is plenty of room for a rebound.

  3. Jimmy

    Or maybe construction growth is still growing but by less than in prior years, after all there is “a pipeline of construction activity arising from the strength of population growth in recent years.”

  4. harrybelbarry

    Or maybe finance commitments down 28 % BUT dwelling investment forecast ??? to rise. The wiggle word ” forecast ” so they don’t know ? or don’t want to tell the truth ? or people coming to live here are paying cash ? after selling up back home.

  5. Jimmy

    Harrybelbarry- You are right it is a forecast based on the best evidence available, but I am 100% positive that they are not engaged in spin or outright lies.

  6. AR

    Jimmy – such 100% positivity in so uncertain a realm as economic forecasting, which makes astrologers seem accurate & credible, rather than credulity stretching.
    Or were you being sarcastic?

  7. JSW

    I read it as Jimmy being sarcastic. Surely he wasn’t being serious…?

  8. Jimmy

    I am not saying that forecasts are 100% accurate, just that the trasury believes them to be right based on the best evidence available. To suggest that Ken Henry, who was appointed by the liberals, is making up figures on which our future taxation and spending will be based, especially in an area like housing growth, just to suit the govt of the day is absurd. How the govt interprets and represents the figures is another thing. If we were to get to a situation when the integrity treasury figures could not be relied upon the whole system would rapidly collapse.

  9. freecountry

    Ah, Jimmy, you’re distorting what I said. I never suggested they were making up figures. I suggested that they are spinning the figures to mean something that those figures do not really mean.

    When pre-existing assets are simply transferred from one group of people (owner-occupiers) to another group of people (investors) this is not investment “growth”. It’s a bit like using the expression “making money”–which businesses actually do–to mean “gaining money”–is just a transfer of money that someone else made. It’s not making up figures; it’s spin. And in this context, that usually means politically motivated spin.

  10. Necessary Illusions

    You are right free country,

    ‘dwelling investment’ is the best euphemism ever to describe the obscene explosion of house prices and the unproductive accumulation of debt in households. While rising employment growth and wages growth can support this ponzi scheme to a certain point, overall it is unsustainable. It can only continue if banks keep lending more credit to home buyers based on ficticious home ‘values’. But should a downturn in employment take place and foreclosures rise, liquidation at the quoted value of the property cannot happen if people are queing up to sell if they are in negative equity territory.

    It is the great scandal of the 2000s that will eventually unravel.

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