Access Economics tips worse-than-expected Budget deficit, but confident on return to surplus

Deloitte Access Economics says the Federal Government will manage to deliver its promise of a budget surplus in the 2012-13 financial year, buoyed by solid commodity prices, but has tipped a budget blowout to near record levels will be announced next week as the GFC hangover and natural disasters damage the books.

The economic analyst has tipped a 2010-11 fiscal year underlying deficit of $51.4 billion. While the forecast is an improvement on last year’s record deficit of $54.7 billion, it well exceeds the official midyear deficit estimate of $12.3 billion from November last year.

Deloitte Access Economics presents a mixed view in its Budget Monitor, with “rivers of gold in full flood” thanks to growth in China and India boosting national income and helping push down unemployment rates.

On the other hand, the lingering effects of the financial crisis, the cost of the recent cyclone and floods, and the difficulties of delivering a tough budget in a hung Parliament are challenges for Treasurer Wayne Swan and Finance Minister Penny Wong, it says.

Adding to the challenges are increases in government spending, the cost of personal income tax cuts, a fall in company tax collections, and the impact of the high Australian dollar on some sectors of the economy.

“The negatives for revenues out of the global financial crisis are lingering longer than expected, while the cost to spending of floods and cyclones suggest fiscal recovery will be even slower to arrive,” the report says.

“That means budget night has to tell bad news stories about the year just ending and the year just about to start.”

“So on Tuesday we expect to hear the Treasurer tell a two speed story about the budget as well as the economy – the budget looks worse than expected this year and next, but it will be better than expected thereafter.”

Deloitte also argues that the Government’s more contentious policy proposals – it does not specify which ones, though the carbon tax and pre-registration for pokies spring to mind – make it very hard for the Gillard Government to “manoeuvre its way through the ‘bad now, better in a few years’ storyline accompanying the budget.”

But CPA Australia this morning reiterated that “sustainable” economic growth, and not putting the brakes on a fragile economy, is more important than returning the budget to surplus.

“We don’t see the urgency in a breakneck return to surplus,” says Paul Drum, CPA Australia head of business and investment policy.

“We know about two-speed economy, so there are elements that will still require some support, and there’s evidence to show there’s been negative growth in some SME areas.”

“To proceed down a path of trying to get back to surplus could have serious impairment on growth.”

Drum nominates bringing forward the mooted reduction in the company tax rate to 29%, cuts in personal income tax, incentives for green technology and across-the-board cuts to department spending as areas the Government could look at.

But Deloitte Access Economics says calls for the Government to break its promise to return the budget to surplus are moot, with China likely to deliver that result anyway.

“Prices will hold up enough to just get the budget into surplus in 2012-13, and they will help to achieve a relatively comfortable surplus in 2013-14,” the report says.

“That is a reminder of why we are frustrated by the lingering media focus on the budget bottom line as an indicator of the performance of the Government of the day. It’s not. It’s an indicator of the health of China’s economy and the associated level of commodity prices.”

Deloitte argues that the Government’s ability to keep its promise to limit spending growth to 2% a year after inflation will be a better reflection of its economic “toughness” than a return to surplus.

“The ability to achieve it does come down to a question of policy courage. China affects revenue, but Governments determine spending. So if you want to know whether the Government is genuinely ‘tough’ – as it has promised it will be in this budget – you need to focus on this latter question.”

And the Opposition doesn’t get off either: Deloitte Access Economics notes they and the independents have “an incentive to talk tough on general matters such as the need for savings, while opposing the specific measures than the Government comes up with.”

“Or, in other words, this budget will have to try to be tough, but Parliament may not let it succeed in being tough. That lack of effectiveness in policy making should be of concern to all of us.”