Sent: 08-05-2012 11:02:03
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Previewing the Budget
What would an annual Australian government budget speech be without the pre-emptive leaks and the occasional theft of budget documents by an impatient journalist? What is happening outside Australia could once again make or break a budget with a wafer thin surplus.
There is a long history in Australia of leaking budget policy initiatives to soften up an otherwise hostile electorate or generate interest in the annual budget night spectacle that might otherwise be lacking.
One thing has changed over the years. Ministers have become more likely to stand up publicly to announce budget changes before the due date. Defence minister Stephen Smith and deputy PM Wayne Swan have both been involved in recent media events to announce aspects of the budget plans for 2012-13. In earlier years, the news would have been provided far more surreptitiously via a tame journalist or two.
Nowadays, the lead up to the budget delivery is a carefully orchestrated attempt to massage expectations. This year, we are being led to expect the toughest budget in 25 years. That might not be an especially high hurdle since government spending and receipts have grown at an average annual rate of 6.3% during this time.
The government has hung much of its pre budget rhetoric and political reputation on getting a surplus in 2012-13. Having left itself so little wiggle room, and given the starting position, we can only assume it will forecast spending slightly (i.e. $1-3 billion) below revenues.
Of course, a budget is just that: a plan. We will have to wait for more than a year to know finally what the outcome for 2012-13 has been.
Arguably, the uncertainties in the year ahead are not much different to what they were in the year just finishing. During the weekend, France elected a socialist president and Greece threw up an inconclusive election result. Meanwhile, Germany's state elections are turning into referenda on the leadership of Angela Merkel whose market leaning Free Democrat coalition partner is fighting to retain its party status.
Local elections in Britain showed how short lived political popularity has become with both conservative and Lib-Dem candidates trounced across the country. Adding to the fluid political landscape, Vladimir Putin is retaking control of the Russian presidency and, however strange it may sound, Mahmoud Ahmadinejad has lost an election in Iran because he was not conservative enough.
In framing the budget, can Australian government ministers be sure that the austerity program championed by Merkel and France's outgoing President Sarkozy will remain intact? Or, is it back to the drawing board with more rounds of meetings that sap the strength of equity markets and erode the tax base even more than happened in 2011?
The U.S. economic expansion, meanwhile, is not weak enough to force the US Federal Reserve to act again to shore up activity. But nor is it strong enough to stop a debate about whether it should. Whenever that happens, the US has a tendency to talk itself into a recession (and drag down everyone else).
The Australian Treasury has consistently missed its revenue forecasts in recent years. Some of the inaccuracy is probably due to analytical methodology but some also comes from the uncertainty attaching to this bigger economic and political picture.
In the coming year, there will be scope for miscalculation on at least two additional fronts that should receive close attention.
From the beginning of the new financial year, Australia's high carbon emitting companies will be subjected to a new tax. Since the level of emissions among the targeted companies should be known already, estimates of revenue from the new tax should be straightforward enough.
Conceptually, the carbon tax will have a small negative impact on prices and activity but the real life impact of an untried policy is hard to model. At a time when household incomes are already growing at recession like rates, the impact of another impost (compensated or not) could prove too much of a strain.
Revenue from the mining industry is more uncertain now than in previous forecast periods. A cyclical reversal in commodity prices is possible as demand slows and supplies catch up. That possibility aside, iron ore and coal are increasingly priced in spot markets. Company revenues are prone to far greater volatility than in the past as a result of the changed pricing arrangements. Forecasting tax receipts will be harder with the revenue at risk to large swings with little notice.
The government usually refuses to reveal the commodity price assumptions underpinning its revenue forecasts. It will probably refuse again despite these assumptions, on their own, having the potential to make or break any commitment to a budget surplus in the coming year.
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