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budget blues « Previous | |Next »
April 29, 2009

The 2009 budget has to give and take, even though the numbers are going to be written in red ink. The federal budget will show a massive deficit for this year, next year, and the one after and it will detail how much the Government needs to borrow to fund the deficit.

Access Economics gives the context in its Business Outlook March quarter issue:

Batten the hatches. The discussion here focuses on risks and uncertainties around the forecasts, but the first message is the most important – conditions are worsening very rapidly, and we recommend our clients batten the hatches. This is not just a recession. It will be the sharpest deceleration Australia’s economy has ever seen. Apologies for the gloom – we do recognise that, in forecasting mayhem, we make it ever so slightly more likely to happen. Still, we wouldn’t be doing our job if we didn’t tell you
what we think comes next. The emerging economies generated three quarters of global growth in the past eighteen months, but now they too are slowing, and their slowdowns will become Australia’s recession. In brief, much of Australia will feel the pain of the collapse in the global banking system by end-2009. Many businesses will fail as demand gains shrink. Unemployment will leap, and profits will be cruelled.

Giving means distributing more borrowed money to stop the economy's hard landing, preventing the unemployment rising towards 10 per cent, and fulfilling political promises such as tax cuts and an increase in the single aged pension. Increasing economic growth is the way to repay to the loan taken out to fund the deficit.

Taking means pay down the mounting public debt that the descent into deficit financing will feed. That means squeezing the welfare state. Who then will be squeezed to achieve the medium-term goal of bringing the budget back towards balance? Most economic commentators point to middle Australia bearing the pain rather than cutting back on the handouts to the coal or car industries.

In its Business Outlook March quarter issue Access Economics raises some good questions. They say that it is not the short term implications of Budget deficits which worry us. Indeed, running anything other than a Federal Budget deficit in 2009-10 would be irresponsible.

Rather, it is the longer term risk of chicken-hearted policymaking now that Canberra’s ‘rivers of gold’ are drying up. This nation has legitimate policy goals in education, infrastructure, Federal/State relations, climate change and water management. What it doesn’t have any more is the money to help achieve reforms in those areas. That leaves some very uncomfortable choices for Canberra’s politicians – of all stripes – as well as concerned Australian citizens. Do we waste continue to money on welfare to the car industry, or do we have an education revolution? Do we maintain all the personal tax cuts of recent years or do we achieve Federal/State reform? Do we pay the promised increases in age pensions, or do we scrape together the money needed to make serious gains in water reform and climate change policy? Do we continue to pay for the middle class welfare of Family Tax Benefit B, or do we subsidise a broadband network?

Tricky trade offs!

| Posted by Gary Sauer-Thompson at 10:18 AM | | Comments (5)
Comments

Comments

Costello is talking about the horrendous repayments in The Age.

Access Economics says the following:

Although Access Economics’ growth forecasts for Australia look ugly, they still represent a soft landing. That’s the good news. The bad news is that such a soft landing could mean Australia’s current account deficit goes from a huge $65 billion this financial year to a mind blowing $100 billion deficit in 2009-10.

"Australia’s current account deficit goes from a huge $65 billion this financial year to a mind blowing $100 billion deficit in 2009-10."

IIRC, Australia's GDP is around a $1 trillion. If substantial inroads can be made into reducing this when the global economy improves but the interest rate climate is still benign, it's not an oppressive burden.

Gary

I voted for Rudd Labor, and unlike many others, I do not regret it. Not a bit. Even though the economic circumstances are nothing like what was predicted when Rudd made those tax cut promises, I still think he must deliver on them.


Politically, I am not a supporter of tax cuts for the top bracket, but if Rudd breaks the promise, he will just be reinforcing the cynicism towards Labor the electorate formed after Keating's L-A-W debarcle.


Rudd is in a unique position to restore some faith in parliament. He should not waste it.

John,
the rumors are that the tax cuts will be kept with the knife being used on middle class welfare (whatever that means). Of course these are just rumors.