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Swan cuts to save surplus: the experts respond

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By Expert Panel 29.10.2012

By Sunanda Creagh, The Conversation and Gillian Terzis, The Conversation

The Federal Government will make around $16.4 billion in new savings over the forward estimates to keep the budget in surplus despite a decline in revenue, according to documents.

Treasurer Wayne Swan said that the Mid-Year Economic and Fiscal Outlook (MYEFO) for the 2012-13 financial year showed a surplus of around $1 billion this year (down from a forecast surplus of $1.5 billion when the budget was released) rising to over $6 billion by the end of the forward estimates.

This year’s forecast surplus had been threatened by revelations that budget revenues were $4 billion below expectation this financial year and almost $22 billion over the forward estimates.

In a statement, Mr Swan said the savings would come from changes to the private health insurance rebate, the baby bonus and workers perks accessed through salary sacrifice schemes.

Real GDP is forecast to grow at 3% in 2012-13 and 2013-14 and the unemployment rate is forecast at 5.5%.

Here are some expert responses to the MYEFO:

John Vaz, Course Director, Master of Applied Finance at Monash University

The first impression that I get from the Mid-Year Economic and Fiscal Outlook is that it’s a bunch of changes that represent fine-tuning. They’ve lowered their costs across the board on quite a few things. Some examples, such as tightening the private health insurance rebate, reduction of the baby bonus, and lowered government grants, the impression that I get is that they knew these savings would be needed later so they kept them in reserve. The nature of these savings is such that you can’t get so much detail in such a short period of time. This suggests to me that, given the previous budget which was released just five months ago, I believe a lot of these were kept on a contingency basis to achieve the surplus.

The surplus was [down] to just over $1 billion. The surplus itself is a political figure. It’s really to show that the Labor government can manage the economy. Of course, achieving a triple A rating is the prime objective of the government. On the one hand, it’s probably justifiable because of borrowing costs. On the other hand, if you’re not spending enough, you run the risk of stagnating the economy even further. So, this is a delicate balancing act.

Without question it’s a political budget. To be honest, I have a feeling that a $1 billion surplus versus a $1 billion deficit is not a big difference in the scheme of things, but it’s all about the impression that it creates about the government’s performance as a financial manager.

Sinclair Davidson, Professor of Institutional Economics at RMIT University

I would say that I’m not convinced by the revenue write-downs announced by the government. It’s actually a very small amount of money that they’ve reduced their revenue estimates by. I would have expected probably bit more. They’re still forecasting about $5 billion from the carbon tax, which is very generous. The corporate revenue receipts also seem to be quite a small number down. I would have thought revenue would have fallen by a bit more.

Some of their savings are going to be a bit controversial. Changes to the baby bonus are going to be very controversial because the second and third child will receive a lot less than the first child. A lot of families will be quite surprised the implicit value judgement that’s contained in that. The change to the private health care rebate is also likely to be quite controversial. Health care inflation is normally rising faster than CPI, so I would have thought that two hits to private health insurance in less than year would be a controversial decision.The other so-called savings revolve around delaying expenditure or postponing it. It’s simply pushing in to the future what would normally be spent now. I think, more or less, it’s mostly shuffling around rather than cutting enough. The things that are being cut are very ideological.

All up, I’m not very impressed — and I don’t believe the numbers they’re reporting.

Graham White, Senior Lecturer, School of Economics at University of Sydney

I haven’t been a fan of this strategy of getting back into surplus at all costs. This, to me, is the same problem: they have a forecast a fall in revenues because of the fall in the terms of trade, and that meant that they’re looking for savings in the budget. Their revenue is going to fall short of what they expected in the budget, and so they’ve sought to get to the same position relative to GDP by looking for extra savings. The surplus is wafer-thin: we’re talking about 0.1% of GDP. They’re saying there’s going to be a size of the surplus relative to what there was in the budget papers.

But is it worth it? The rationale they’ve given today is at best superficial. The only rationale that is thought-provoking in any sense is that they have some big-ticket items coming up; namely the disability insurance, funding the Gonski education reforms, and the changes to dental health. They may argue that they have these big-ticket items coming up in future budgets, and that they need to prepare now.

The fall-off in our revenues is largely due to the fall in our terms of trade — that is, the global prices of our exports have come off the boil. We’re certainly not insulated from global uncertainty, and that’s what is driving the savings announced today. But even if we didn’t have those savings, and we allowed for a hit on the budget (i.e. not bring in a surplus in 2012-13), I’m not quite convinced that this is going to be earth-shattering. We are still far ahead in terms of our low debt/GDP ratio compared to the rest of the world — certainly compared to the Euro area, the US, and Japan. Again, there’s a lot of statements about “consolidating our fiscal position” — a lot of big words here — much of it is a bit of fluff to me.

They’ll say things like, “Our targeted approach to savings minimises the impact of the government’s fiscal consolidation on the economy.” My God, what a lot of econocrap-speak that is! It says absolutely nothing of any substance. If your economy is weak in some sectors, and you’re crunching down on expenditures too much, you could run the risk of slowing down the economy. There’s that danger as well. If we didn’t have the savings announced today, I don’t think the sky would have fallen in.

This is as much a political imperative — if not totally so — as it was with the case of the budget earlier in the year.

Graeme Wines, Professor in Accounting at Deakin University

The government is now budgeting for a $1.1 billion surplus. They’ve pulled a whole lot of expenditure back into the last financial year. The narrow $1.1 billion figure this year needs to take into account that there was a $43.7 billion deficit last year. That puts the very small size of the surplus into perspective.

Jakob Madsen, Xiaokai Yang Professor of Business and Economics at Monash University

Not many surprises — this budget update was very predictable. Clearly, the government expected quite a high surplus, but now they are targeting a more balanced budget. That’s OK — it’s still a sustainable path. They were clearly too optimistic; it hasn’t gone quite the way they would have wanted in terms of revenue and expenses.

Since the last budget, the European sovereign debt crisis has become worse than they expected. It’s been looking ugly for a while, and there’s no reason to expect a turnaround there. The main component that has been targeted wrongly has been commodity prices. They expected $20 billion higher revenue just from mining taxes, and commodity prices are impossible to predict. There’s no model in this world that can predict them.

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The Conversation

This article was originally published at The Conversation. Read the original article.

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