When you run a big business like Australia you need to take account of many all your stakeholders and you make choices. That’s what Labour has done last night – they have favoured their political constituency at home over the wealthier. They have played to the international audience by delivering a surplus HEADLINE – this keeps us out of the mess that is engulfing Europe and concerns about deficits, fiscal positions and fiscal space.
But what have they really done and how will it impact our economy.
Certainly it’s easy to knock Wayne Swan and Labour for last night’s Budget given the apparent chicanery used to achieve the wafer thin surplus of $1.5 bln for the next Financial year.
I think the best summary along these lines that I have read comes from Adele Ferguson in the Fairfax press,
The promised 2012-13 federal budget surplus of $1.5 billion was achieved largely by targeting companies and the so-called one per centers, sprinkling it with a good dose of accounting trickery (shifting some expenditure between years), and using some overly optimistic economic forecasts and super-sized projections for carbon pricing.
Yep, by moving payments around – pulling them forward, by cutting large swathes of spending, dropping a promise or two and targeting the so-called rich and their perks but particularly in expecting Treasury’s growth projections to be right for a change the Government will get to its surplus figure.
As pointed out to me last night by Twitter mate @AusMMT if Treasury’s panglossian forecasts are out by just 1% (which I’m betting they might be) then the budget swings from surplus to a deficit of $7.1 bln – you can see the relevant budget paper here.
But I guess the key thing to say is that this is always the case – the budget is always hostage to the expectations that back it up. It’s not right to say garbage in garbage out but in this world of heightened uncertainty it’s simply folly to predict a number for the surplus with any confidence.
But leaving aside the ebb and flow of where the money has come from and where it is going does that matter?
I would say both yes and no.
Whether you want to characterise this as an election budget I like the fact that there is a net flow of funds to the less wealthy households at a time when they are under the pump economically. Could this be stimulus Mark II that flows from Mining Boom Mark II and give a lift to the economy in the way that the first stimulus did a few years ago? I hope so because it could make a material difference to economic activity if it does.
And does it really matter if the company tax rate stays at 30% instead of moving down to 29% – I doubt it makes much difference in the long run and for small business there are offsets anyway.
So overall in a world of uncertainty I think this budget has achieved a balance against the restrictions that the government’s financial situation and the global economic outlook and enduring malaise. There are many risks that the outcome is substantially worse and my guess is that we’ll end up with a budget deficit of $10 bln or more when we sum up the 2012/13 financial year in 14 months time.
The irony, or unintended consequence, of this budget for me though is that Treasurer Swan essentially implored the RBA to keep cutting in last night’s speech. Clearly the Government has made the political decision that in handing money to their constituency while in aggregate believing their drive for surplus will necessitate more rate cuts for home owners the combination will be politically positive for them.
But the pull forward of School payments and Carbon offset transfers to households runs the risk of being a cash splash that distorts the economy in a positive manner as did the family transfers under Prime minister Rudd. If that’s the case then the RBA may just have to wait a little longer to get a true picture of economic activity.
As a behavioural economics guy on this positive risk alone I give the Budget a PASS
Ironic isn’t it!
Have a great day
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