Get ready for a recovery budget, with some austerity thrown in: Kohler

You may think, if you took any notice of politics this weekend, that you are in some kind of parallel universe.

The toughest Federal Budget in a generation is about to be brought down, but the Prime Minister and Treasurer are out and about spruiking handouts – a “Schoolkids Bonus” and a retrospective tax deduction for small business losses.

Don’t worry; little or no money from these things will be paid in 2012-13. The PM made it clear the Schoolkids Bonus, which is a $430 million addition to the existing Education Tax Refund, will be paid out of this year’s deficit and the extra small business deductions won’t start being paid till 2013-14, and with GDP growth expanding it won’t cost much anyway.

In other words, the bits of weekend pre-budget spin actually had little to do with the 2012-13 budget being delivered tomorrow, although they will be in the forward estimates, that excellent device that allows the treasurer to add up four years to make everything sound like a lot.

It’s clear that the budget will be dominated by two things: a return to trend growth and the natural phasing out of the stimulus measures from the GFC.

The growth forecast will be 3.25% – the mid point of the Reserve Bank’s average growth forecast of 3-3.5% for 2012-13 released in the Statement on Monetary Policy on Friday.

This will be at least one percentage point more than growth in 2011-12, which will be justified by a return to full mining production after last year’s floods and by three RBA rate cuts totalling 1%, so far. That addition to growth will produce about $35 billion extra tax revenue in Treasury’s modelling.

Most of the rest of the surplus will come from the natural reduction in spending as the stimulus measures from the last few budgets come to an end, and from pulling expenditure for 2012-13 forward into 2011-12.

According to ANZ’s chief economist, Warren Hogan, the budget turnaround will produce a drag on growth of about 1 percentage point in 2012-13. To offset that, the government is banking on at least another 75 basis points of rate cuts, and a decent devaluation of the currency.

If you clear away all the frenzied spin – from both sides of politics – this budget, at its core, will probably be a fairly ordinary economic recovery budget, with a bit of austerity thrown in.

This article first appeared on Business Spectator.