The blizzard of leaks about Tuesday’s budget continued at the weekend – all the good news on child care policy and other voter friendly initiatives being released to soften up voters.
That means the bad news will be made known on Tuesday night – moves such as restructuring family payments and the silly parental leave scheme of the Prime Minister.
Small business will get a tax cut, and possibly some relief on investment (though it would be better to do it all through accelerated investment allowances because so many small businesses actually pay company tax and tax cuts tend not to get spent, while tax breaks down get spending going more quickly).
Watch also for a move to push up the excise on petrol now that there seems to be a rational person running the Greens rather than the illogical Christine Milne.
The size of the deficit will be of interest, but in the scheme of things of this government’s new priorities, it’s not a big deal like it was last year – for political reasons.
Watch also for the government to try very hard not to put up taxes, the so-called Google tax has gone, but they will tax some types on offshore online transactions in an attempt to help their retailer mates.
There will be much talk about higher spending on infrastructure, but this government has talked the talk in this area, but done very little except recycle previous government plans, or fight and argue with the Victorian government.
But the grim reality is that the economic outlook this year, compared with that confronting the government a year ago – will be much weaker.
Friday’s weak trade data from China for April underlines how fragile the underlying outlook is for commodity prices in our biggest export market, as did last night’s surprise rate cut from China’s central bank.
Exports down surprisingly, imports down again as the weak global prices for iron ore, oil, copper and grains reduce the cost of key raw materials to Chinese industry.
But that’s also pressuring those same industries – producer prices fell for the 38th month in April. Weak demand from the recessed property sector and exports are adding to the downward pressure on demand for imports of products such as Australian iron ore, coal etc.
So that’s why lower than expected commodity prices and weak wages growth will have delivered another blow to revenue and blow out in the budget deficit of around $8-$10 billion a year compared to the projections in the December Mid-Year Economic and Fiscal Outlook and a further delay in the return to surplus.
The AMP’s chief economist, Dr Shane Oliver says that after a 2014-15 budget deficit of $45 billion (or 2.8% of GDP) the deficit for 2015-16 is likely to be around $41billion (2.4% of GDP), which is $10 billion worse than projected in December.
"We are now looking at a 13 year run of budget deficits which swamps the 7 years seen in the 1990s and the 5 years in the 1980s. What’s worse is that this time around we haven’t even had a recession,” he wrote on the weekend.
"The continuing delay in returning to surplus from a projection of 2012-13 in the 2012-13 budget, to 2016-17 in the 2013-14 budget, to 2019-20 in the 2014-15 budget and now to around 2021-22 is cause for concern and begs the question whether we will ever get there.
"There are real reasons for concern here because demographic pressures on the budget will start to build from early next decade and we now don’t have a lot of flexibility to provide stimulus should our luck turn against us and the economy really turn down.
"The good news is that this year is likely to see a more politically measured approach from the Government so there is unlikely to be the big negative for confidence that last year’s fairness debate and Senate debacle proved to be.
“The Government is unlikely to fight the hit to revenue but rather fund any additional spending by middle ground political measures – such as lowering the assets test for the pension, measures to combat tax avoidance by multinational companies, extending the GST to low value online imports and a bank deposit tax,” Dr Oliver wrote.
“Spending” measures are likely to include more generous but more targeted child care payments, a small business tax cut and increased infrastructure funding.
Source: AMP Capital
