18 December 2013
David Crowe and David Uren
AUSTRALIA is heading for an economic trough that will put more jobs at risk as the mining boom subsides, deepening the budget deficit and putting federal debt on track to hit $667 billion.
In a bleak revision of the nation’s outlook, Joe Hockey declared that the “entire community” would have to accept spending cuts and other harsh measures to prevent the deficits from continuing for a decade.
The Treasurer made it clear tax cuts were off the agenda and reforms next year could include health and education, although there would not be any cuts to spending on those areas in the four years of the budget forecasts.
All savings options were being considered, including reforms to family tax benefits and generous tax concessions.
“Every area of government expenditure is being examined, not just for its immediate impact, but for its sustainability as well. I think that is a key issue,” Mr Hockey said.
Adding an edge to his warnings last night, Mr Hockey said there would be “no free lunches” from the government as he attacked Labor for objecting to the repeal of handouts such as the Schoolkids Bonus.
The federal government’s first major economic statement warns of a sharper contraction in the mining boom than previously thought, cutting the nation’s growth to 2.5 per cent next financial year.
Unemployment will rise from 5.8 per cent to 6.25 per cent over the year ahead, and will stay at the higher level for longer than expected in the budget update given to voters before the federal election.
Mr Hockey said the steeper fall in mining investment could wipe 2 per cent from economic growth in the next two years, signalling he wanted to clear roadblocks from new projects.
“It is therefore crucial that we do everything we can to facilitate new mining investments such as the Roy Hill iron ore project in the Pilbara and gas projects across the country,” he told the National Press Club yesterday.
“Moreover, it is essential that we get rid of the carbon and mining taxes, which are impediments to new mining investment.
“It is also the case that we need to speed up mining approvals so that we don’t have delays that may cause investors to have second thoughts about projects, as in BHP’s change of heart on Olympic Dam.”
Labor attacked the budget update as a Coalition attempt to blame the former government for the blowout in debts and deficits, given a change in Treasury methods that made the forecasts more conservative.
Industry groups cited the revision to urge Labor and the Greens to stop blocking government spending cuts, saying Australia already suffered from high costs and could not afford an increase in taxes to balance the budget. As expected, this year’s deficit has swollen from $30.1bn to $47bn in the three months since the last budget update, with the change made up of $10.3bn in Abbott government decisions and $6.6bn in cuts to tax revenue forecasts.
Left unchecked, current policies would lead to a deficit of $34bn next year and then $24.1bn and $17.7bn in the following two years, with no end to the red ink over the decade ahead.
Commonwealth borrowings were tipped to reach $401bn by 2017 in the budget statement before the election but yesterday’s revision says the gross debt will reach $667bn by about 2024.
Net debt, which includes assets such as the Future Fund, will reach $280.5bn by 2017.
Ratings agencies made no change to their AAA ranking of the commonwealth yesterday.
Central to the new forecasts is a 3.7 per cent increase in federal spending every year, a figure Labor rejects but the government justifies by citing similar growth over the past five years.
A tougher spending regime is certain when Mr Hockey releases the annual budget in May, which will include a response to a commission of audit that is tipped to recommend deep cuts.
The Coalition has sworn not to make cuts to health, education, defence and medical research but has not ruled out making adjustments to the way money is spent. The government’s mission would be to curtail the growth in spending on those and other areas over the long term, sources said late yesterday.
ANZ’s head of Australian economics Ivan Colhoun said that while the government was right to present a conservative set of economic and budget forecasts, he believed they exaggerated the weakness of the economy.
“I think they might have gone too far and could well be surprised on the upside in the May budget,” Mr Colhoun said.
He said although the update showed a deterioration in the government’s finances, it would not trouble financial markets.
“The forecast for the budget deficit in 2016-17 is 1 per cent of GDP and that is no disaster and the peak of net debt is under 16 per cent of GDP, which is also much less than other countries,” Mr Colhoun said.
“This is not a flaming wreck.”
He said the downgrade in the forecasts was nearly entirely due to weaker economic growth and a few policy decisions taken by the Coalition since its election.
“They can’t claim that the big numbers are Labor’s legacy; that sounds disingenuous to me,”
Deloitte Access Economics partner Chris Richardson said the cycle of budget downgrades that began with the 2008-09 global financial crisis had now eroded all the benefit to the budget that had built up in the latter half of the Howard government during the resources boom.
At its peak, just before the global financial crisis, the resources boom was adding more than $300bn to the four-year budget estimates but that has now evaporated.
Mr Richardson said that both Labor and Coalition governments had spent over the past decade as if the boom would continue.
While both major parties sought to blame each other for the problems, he added, the downgrade in the economy was the main reason for the weakness in the budget numbers yesterday.
“The problem is wages, profits, coal and iron ore prices; it isn’t Labor and who did what,” Mr Richardson said.
Mr Hockey would not say what personal or business outlays would be cut back but said the day of “blank cheques” from government were over.
“The days of just handing out cash, helicoptering money out, is just not possible,” he told ABC TV last night.
The Treasurer blasted Labor for opposing the removal of the Schoolkids Bonus, arguing that $730m would be spent this year on cheques to households.
“You can’t just keep sending out cheques because at the end of the day there’s not much left in the taxpayer’s pocket,” he said.
The alarm over the deficit triggered conflicting pressures last night as business groups called for deep spending while the social services sector warned it would be “dangerous” to fix the budget too quickly.
Australian Chamber of Commerce and Industry chief Peter Anderson rejected the argument for tax increases to help balance the budget.
“The heavy lifting has to be done on the expenditure side, because we are already an expensive place to live and do business, meaning that there is no tolerance factor in households or enterprises for higher taxes to finance profligate spending,” Mr Anderson said.
Business Council of Australia chief Jennifer Westacott sent a message to all sides of politics to vote for spending cuts, saying the government must have the “support of the parliament” to reset the budget.
Australian Council of Social Service chief executive Cassandra Goldie blamed previous income tax cuts for some of the problem and warned against cuts.
“Recent decisions show a concerning trend towards targeting those at the bottom to bear the brunt of budget cuts and largely sparing those at the top end,” Dr Goldie said.
Courtesy of the Australian
18 December 2013