SURPLUS
Wayne Swan’s fifth Federal Budget has delivered its budget surplus promise, or at least the projection of a surplus of $1.5 billion (0.1% of GDP) at the end of the next financial year, widening to $7.5 billion by 2016. Mr Swan told parliament the deficit years of the global recession are behind us and the surplus years are here.
It is the biggest budget turnaround in more than half a century, despite a bigger than expected deficit. In the current financial year the deficit is expected to reach $44.4 billion (–$3.0% of GDP), up from last year’s forecast $37.1 billion in November’s Mid-Year Economic and Fiscal Outlook (MYEFO).
Westpac Banking Corporation (ASX:WBC) says, “The impact on the economy of such a sharp fiscal contraction is uncertain, particularly given risks around the global outlook.” These concerns were echoed by ANZ Banking Group’s (ASX:ANZ) chief Mike Smith who has criticised the government’s rush to reach a surplus.
MAIN THEMES
So how has the government done it? Finance Minister Penny Wong says the budget has taken about $34 billion in savings to ensure the surplus continues and grows over time so it can be used to start paying off net debt. Spending cuts have been taken in defence, foreign affairs, pharmaceuticals, the public service and welfare. Businesses will also lose a 1 per cent tax cut as part of the mining tax package.
A dominant theme in the budget includes the redistribution of wealth from high to lower income earners and boosting taxation for mining companies and carbon emitters. The government’s revenues are expected to grow from the introduction of the mining and carbon taxes from July 1, 2012.
Commonwealth Bank of Australia (ASX:CBA) CommSec Economist Savanth Sebastian says the main winners from this year’s budget are low income families with school children and those who will benefit from funding from a new Disability Insurance Scheme and a new Dental Health Scheme.
GROWTH FORECASTS
So on what forecasts has the government based these projections? The government has cut its forecast for economic growth this year, but held its outlook for next year. Real Gross Domestic Product is expected to grow at a rate of 3 per cent in fiscal 2012, down from an earlier forecast, but, rise to 3.25 per cent next year.
National Australia Bank Limited (ASX:NAB) says the Government’s economic outlook appears broadly plausible, although slightly more optimistic than its own forecasts and that of the Reserve Bank of Australia’s. Westpac Banking Corporation (ASX:WDC) has labelled the forecasts “credible”.
SECTORS
A boom in mining investment is expected to see the resource & resource-related sectors contribute to between 15 and 20 per cent of GDP over this year. The remaining 75 per cent 80 per cent of the economy is expected to grow at about 2 per cent. The mining sector is forecast to attract a record $120 million into projects this year, representing about 12.5 per cent of GDP.
Treasury says, the outlook for some parts of Australia's patchwork economy is uneven with unsettled global conditions, the high Australian dollar, ongoing consumer caution and changes in expenditure patterns all expected to weigh heavily on some sectors. Treasury believes while some of the headwinds outside of the resources sector are likely to be temporary, some are structural, reflecting the broad structural transition that is under way across Australia’s economy.
