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Budget surplus, whatever it takes

By: Colin Brinsden
11 April, 2011

Voters wouldn't mind if it was delayed and financial markets are fairly relaxed about it, but the federal opposition would have a field day.

For that reason, Treasurer Wayne Swan will in all likelihood stick to delivering a budget surplus in 2012/13 when he hands down his fourth budget on May 10.

Swan has insisted he will produce a surplus in this timeframe, although in recent times he has conceded the task has been made more difficult by the cost to the economy of the recent spate of natural disasters.

Still, he told parliament last month in a ministerial statement that when faced with an economy reaching full capacity in coming years, it was essential to maintain a very strong fiscal strategy.

More than 300,000 jobs have been added to the workforce in the past year, the national income continues to strengthen from robust terms of trade, and there was a very solid investment pipeline, particularly in the resources sector.

"All this underscores the need for a very strong and tight fiscal policy and the return to surplus," he said.

And all this is true, but is it essential that it has to be by 20121/3.

From an economic sense, not necessarily.

As former long-time ANZ chief economist Saul Eslake told Channel Ten's Meet the Press last Sunday, he wouldn't think any less of the government if the surplus was deferred by a year or so.

"I do not think it is a compelling economic imperative to deliver a budget surplus of a fixed amount to a predetermined timetable," Eslake said, who is now with the Grattan Institute.

"I think that returning the surplus in 2012/13 is more a political judgment than an economic one."

But if the government were to continue to run very large budget deficits as the economy approached full employment as the mining boom got into full swing and inflation pressures started to rise, "it would be rightly criticised by the opposition and financial markets".

As for the voting public, they don't seem to mind a delayed surplus if it means the government can maintain services and investment in roads and other infrastructure.

Essential Research's weekly online poll found that 69 per cent of voters said the government should delay the return to surplus, support that was evenly spread between Labor, coalition and Greens voters.

Only 14 per cent said the government said should stick to its timetable.

Furthermore, 49 per cent of the 1013 respondents said the government should maintain its current level of spending, while 15 per cent said it should increase it.

But the signs are that the government will have less revenue to play with in the short-term, primarily as a result of this summer's natural disasters on the homeland and the tragic events in Japan.

Treasury estimates that the floods and Cyclone Yasi will cost the economy $9 billion, with the loss of coal production accounting for some $6 billion and crops damage making up some $2 billion.

And even this may prove conservative.

Businesses have told Treasury that the hit to coal alone could be as much as $8 billion.

On top of that, the earthquake and tsunami in Japan could hit Australian export earnings by $2 billion in the current financial year.

All up, this could have an economic hit of 0.75 per cent on gross domestic product, much of which will be seen in the March quarter.

It could well be the economy suffers a quarter of negative growth because of these events, which would be the first contraction since the December quarter 2008 during the depths of the global financial crisis.

One could argue that if economic growth is going to be that weak in the near term, and a lot softer than predicted in last November's mid-year budget, is now the time to be slashing the budget.

But Swan has more or less staked his political career on bringing the budget back to surplus in 2012/13.

"I think that by hook or by crook that political imperative, they'll achieve it regardless of whether that's appropriate," Macquarie Research senior economist Brian Redican said.

In any case, the hits to the economy now from natural disasters, and associated spending for the reconstruction process, shouldn't still be impacting in 2012/13.

At the same time, Redican said the government hasn't been talking about the fact that commodity prices are a "hell of a lot higher" than it thought late last year.

"That could easily add another $10 billion to the budget bottom line, but that hasn't been focused on at all," he said.

While the government "won't want to count their chickens before they're hatched", Redican says there is a chance that the 2011/12 deficit would be a lot lower, while 2010/11 will be a little bit worse.

In the Mid-year Economic and Fiscal Outlook (MYEFO) a budget deficit of $41.5 billion was forecast for 2010/11 and a shortfall of $12.3 billion was predicted for 2011/12, before reaching the sacred surplus of $3.1 billion in 2012/13.

But even if Swan bites the bullet and delays the surplus for a year or so, Redican doesn't expect financial markets to react at all.

Rather the focus will be how the government's budget policies getting to its target will impact on economic growth.

"Whether it is a deficit of $5 billion dollars or a surplus of $5 billion, it really doesn't matter from an economic perspective, and they are the kind of figures we are talking about," he said.

"We really are splitting hairs."

Source: AAP NewsWire

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