Swan downplays surplus expectations ahead of May Federal Budget

Federal Treasurer Wayne Swan has played down expectations of returning the Federal Budget to surplus before 2012, saying the financial crisis has continued to impact Government revenue.

It comes after some forecasters have said new corporate deals, including recent agreements within the resources sector such as increased iron ore prices, will help improve the Government’s bottom line.

Wayne Swan addressed budget forecasts released from financial groups and lenders in his economic note yesterday, which indicate the Federal Budget may return to surplus earlier than expected. Countering them, he said that the financial crisis will “act as a drag on government revenues for some time to come”, despite recent strong economic data.

“While most people understand the benefits of higher growth and lower unemployment, what is less well understood is the significant lag between the rebound in the real economy and the recovery of government revenues and the Budget bottom line that comes with it,” he said.

Swan also said that company profitability took a big hit during the recession, and that “the profits of private non-financial corporations fell by a massive 16.5%” in the year following Lehman Brothers’ collapse.

“Those lower company profits will continue to weigh on company tax collections, even as the economy recovers. That’s because the accumulated losses that built up during the downturn can be used to offset profits made during the recovery. For example, losses incurred during the early 1990s recession were used to offset company profits for at least the following five years of recovery.”

He also said that while higher growth and lower unemployment rates automatically reduce spending on benefits, he warned that consequences of the crisis will be felt for some time.

In a budget update last year, Swan predicted a deficit of $57.7 billion for the current financial year, and a $46.6 billion deficit for the 2010-11 year.

But some economists, including AMP capital’s Shane Oliver, believe that figure will fall, resulting in a surplus before 2012.

However, it has been reported that Swan has told colleagues these predictions are off the mark, and that falls in asset prices will result in fewer capital gains.

Meanwhile, the Government is hard at work attempting to cut back on spending in order to keep the deficit as low as possible. It is understood the Cabinet budget committee will meet this week in order to decide how to save funds already earmarked for new initiatives such as health reform.

It has been reported that some of the measures recommended by the Expenditure Review Committee, such as merging some areas of Government agencies, have resulted in significant savings.

Additionally, corporate law minister Chris Bowen said yesterday that surveillance checks on individuals receiving welfare benefits will be ramped up, with previous checks resulting in savings worth millions.

But despite the Government’s attempts to keep spending under its 2% growth target and bring the Budget into surplus, Swan has said next month’s figures will reveal the country is in a strong fiscal position.

“With the budget now just five weeks away, it’s good to know that the success of the stimulus means we approach this budget from a position of strength,” he said.

He also addressed the appointment of a population minister, the removal of the wholesale banking guarantee and Australia’s continued investment in the resources sector.