The local stockmarket eased and the Aussie dollar traded in a tight range ahead of tonight’s well-leaked Federal budget.
The market fell 12 points and the dollar traded around 93.62 US cents for most of the day and overnight.
The ASX 200 Index and All Ordinaries Index each dipped 0.2% to 5448.4 and 5429 respectively, with the resources sector seeing the biggest falls thanks to falling iron ore prices.
The National Australia Bank’s monthly business survey showed confidence rise two points to six in April, after falling three points to four in March.
But business conditions fell noticeably, with forward orders down 8 points, suggesting a sudden loss of confidence in future economic demand.
The NAB also revised its official interest rate outlook, dropping their call of a 0.25% cut in November and keeping steady its forecast for rate rises late next year.
The move made NAB the last of the big four banks to call the end of the current rate cutting cycle.
The budget will see thousands of job cuts, program axings, a few tax rises and lots of rhetoric about smaller government, hints at future tax cuts (why?), and all that guff about the ageing of Australia etc etc.
But the points to watch for in the budget aren’t the cuts to spending, programs jobs etc and the claims from Treasurer Joe Hockey (who, remember has boosted the size of the deficit by close to $16 billion by his own decisions, including the $8.8 billion handed to the Reserve Bank).
Instead, look at Treasury forecasts on growth, demand, unemployment, jobs growth, wages growth, the size of the deficit (which is one of the least important indicator), inflation and the impact of the budget on economic growth.
That will give us a better idea of the impact of the budget on the economy – which, when coupled with the various state budgets, could be larger than normal.
The Reserve Bank has already warned that the slowing and cutting of government outlays (from all levels of government) will be half the average on the past few decades.
That means the impact on the economy from the Federal, State and local government budgets will be half what it has been for the past few decades.
The AMP’s chief economist, Dr Shane Oliver reckons the impact of the Federal budget will only add 0.3% to economic growth in the next year, but the cuts could hit growth over the following two to three years.
The RBA forecasts growth to be around 2.75%, based on its estimates of the cuts to government spending. Cutting that back to around 2.4% would mean growth will slow during the year to be even further under the trend growth level for the economy of 3% to 3.25%.
That could mean a small rise in unemployment, or no real improvement until 2015. Certainly cities like Canberra will probably slip into a local recession with all the job cuts. Property prices will also fall and retail sales will weaken.
In his economic update at the weekend, the AMP’s Dr Oliver said; "Our concern is that the government has exaggerated the budget problem – it’s a problem, but far from an emergency – and that this combined with the political cycle, which argues in favour of getting the budget pain over with early, will result in the government going too hard in terms of the fiscal austerity.
"The OECD has rightly warned Australia that heavy front loading of fiscal consolidation should be avoided," Dr Oliver said.
"Right now the economy is still a bit fragile with only tentative signs of improvement in the non-mining economy.
"But this could be snuffed out if the budget is too tough. The key is to put policies in place that bring long term spending growth under control, as opposed to adopting too much austerity in the short term. Hopefully this will be the case."
Other economists agree with this, others disagree.
Dr Oliver says the negative impact of the government’s tightening could detract 0.8% from growth by 2017-18.
Now that’s too far in the future to be accurate, but the point is that the Government will retard growth for the next three years, not add to it and generate more tax revenues.
Mr Hockey is expected to forecast a deficit for the 2014-15 financial year of about $31 billion, with a return to balance in 2018-19 and a surplus of one per cent of GDP by 2023-24.
The new budget bottom line is a world away from the Pre-Election Economic and Fiscal Outlook produced by Treasury, which forecast a surplus of $4.2 billion in 2016-17.
The coalition’s decisions since the election, announced in the Mid-Year Economic and Fiscal Outlook (MYEFO), will add an extra $10.3 billion to the deficit in 2013-14 and a further $3.5 billion over the following three years.
The government will also trumpet its planned $80 billion over six years for key road and other transport projects, co-funded by the states.
That will turn out to be the biggest positive from the budget, although it will include programs already committed to by the former Government because infrastructure project take longer to get up and running (and end up costing more).
According to AAP this is a list of leaked budget measures. The question is if this covers all the nasties, or is there worse to come?
Taxes
• Deficit levy of 2% on incomes of $180,000 or more
• Reintroduce indexation of the fuel tax excise, adding between 2.5¢ and 3¢ to the price of petrol
• 1.5% reduction of the company tax rate, to 28.5%, to begin in July 2015
Welfare
• Raising of pension age to 70, affecting people born after 1965
• Linking the disability support payment to inflation rather than wages growth
• Regular reviews of disability payment and age pension recipients’ eligibility
• Reintroduction of work-for-the-dole scheme
• Ending of income support bonus paid twice a year to welfare recipients
Health
• Medicare fee on GP visits, of between $7 and $15
• Commitment to National Disability Insurance Scheme
Education
• Continuing former government’s Gonski funding over four years before shifting to a new model
• Some form of de-regulation of university fees, allowing providers to charge more for courses
• Extension of government funding to private colleges and TAFEs
Families
• Tighter eligibility for family tax benefits with $100,000 means test
• Paid Parental Leave scheme, now a maximum payment of $50,000 for mothers earning $100,000
• Abolition of Schoolkids bonus
Public service
• 16,000 federal government jobs to be slashed as more than 70 government bodies are amalgamated, abolished, or privatised, including the Royal Australian Mint, Hearing Australia and several tribunals.
• 3000 jobs to go at the Australian Taxation Office
• New Australian Border Force to combine customs and immigration
ABC
• National broadcaster to face a 2.25% efficiency dividend
• Scrapping of Australia Network, currently run by the ABC under a 10-year, $233 million contract
Environment
• $1.55 billion over three years for the Emissions Reduction Fund, part of government’s Direct Action climate change policy
• Axing of National Water Commission and Australian Renewable Energy Agency
Superannuation
• Abolition of government contribution to superannuation funds of those earning $37,000 or less
Infrastructure
• $10 billion infrastructure package including spending on major projects and encouraging privatisation of state assets
