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2009-05-13

Swan budget09 - my first impression

This is my first response to Swan Bedget09, focusing on a couple of issues: the economic forecast used in the 2009 budget and the so called structural budgetary problem. They are, one might say, related to Treasury. That is why people may not question Swan/Rudd much over those yet. There are three points to be discussed:

· The economic forecast for the years to come
· The structural budgetary issue during the late Howard/Costello government
· The same structural budgetary issue now It can be shown:

· The economic forecast for the years to come to underpin the budgetary recovery back to surplus is too optimistic to achieve

The forecast economic growth for Australia for the two or three or more out years in the budget is 4.5% per year, above its trend growth. To start with, economic forecast is more an art than a science. Two years ago, probably virtually no forecasters in the whole world had foreseen the coming of the world great recession now we are having. The IMF in the past half years revised its forecast of the world economic growth outlook down 4 to 5 times. They are an indication of how unreliable economic forecast can be.

Against this background, any economic forecast can be questionable. However, the forecast used in the government's 2009 budget has caused particular eyebrows among not only many economists but also non-economists. One is also reminded that the government and the federal treasury also changed the traditional method and extended the more detailed forecast from normally two years to three, not long before the budget was made. It was said this change would make the forecast picture more accurate.

Let's look at some background information regarding the deficit. The Swan 2009 budget presents that the budget for the financial years 2008-09 and 2009-10 will be in deficit to the tune of $32.1 and $57.6 billion, the latter nearly 5% of GDP. This compares to last year's budget forecast of more than $20 billion surplus for 2008-09. Over the next few years, the government will accumulate a net debt of $188 billion. It is projected that the budget will return to surplus in 2015-16. It further assumes the debt to GSP ratio will be lowered to below 4 per cent.

There are likely two key problems with the economic forecast. One is that it has ignored the inevitable slow down of the world economy post recession, not so much caused by damages done by the recession, but more importantly by big structural changes in the largest international economies, such as the US, China. The US consumption share of its GDP will go down and the share in China will go up. These changes represent a new course for the world economy. It will be a new and uncharted water for the those economies as well as for other exports oriented economies for a period that will take at least those years shown in the budget. The paradigm shifts in international economies will lower growth in many countries for a number of years to come.

Two, while it is understandable though unusual to assume above trend growth, it is very unusually unusual and very hard to understand to assume that for a sustained period. They may argue that it is possible, but the possibility is very slim and highly unlikely.

Further, it is highly likely to be problematic by comparing this recession and the one in the 1990s. One needs to keep in mind that world growth in the 1990s after the (Australian) recession was higher than that in the 1980s. It occurred against the background of the end of the cold war following the collapse of the USSR, and the rise of the internet to boost technological changes and productivity.

Although the two appeared to have occurred together at the same time coincidentally, the combination of them produced extraordinary results in terms of world productivity and growth. The US and the West did not need for the first time in a few decades to spend as much in military and defence as they used to. The spread in the application of the internet technologies fuelled the growth of technology stocks which promoted the techonology bubble, which went burst and crashed at around 2000 or so. Another direct benefit of the reduced (to almost non-existent degree at one stage perhaps many had thought) security threat due to the end of the cold war was the more rapid transfusions of military technologies and productive capacities to civilian uses. Clearly productivity improvement in Australia in the 1990s was very impressive in that broad international context.

· The so called structural budgetary issue during the late Howard/Costello government is unlikely to be correct.

The Howard/Costello government managed its budget very successfully, although people may have a number of issues with the Howard government, such as the Tempo incident, the children overboard lies, the refusal to rectify the Kyoto protocol to reduce emissions, and to go to the Iraq war that has been proved to be based on false intelligence, and etc. It had paid down about $90 billion government debt inherited from its Labor predecessor. It set up a future fund. At the same time, it lowered taxes and returned taxpayers money.

Had it not lowered the taxes, it might have spent them. It is highly likely that would have been a greater waste if they were not spent prudently and productively. When government is awashed with cash, the efficiency of its spending is likely to be lower. So it is natural and the right thing to do to lower taxes to lift the burden to taxpayers and to let them to decide what they want to do with their wealth.

Few had forecast the coming of a great recession world wide and the end (I would say a temporary one) of the mining boom. It is not too difficult to understand that if one just considers the underlying economic forecast used in Swan's 2008 budget. It was one year after Howard/Costello last budget. It did not foresee the coming of the end of the mining boom. It even projected $20 billion budget surplus. It continued to reduce taxes, not only in the 2008 budget, but even in this one. So it is wrong to blame/accuse the Howard/Costello government and brand them to have got a structural problem. In that environment, lowering taxes and returning money to taxpayers was the right thing to do.

Further, there are inevitable uncertainties over the future and some events may be very surprising and unexpected. A government needs to lower taxes when it can afford to do so after it fulfils its duty as the government. It may need to raise taxes when things have changed unexpectedly. It may be unpopular to raise taxes. But one cannot expect that any government would be always fortunate enough to avoid the need to do it.

And even it were correct, it was likely to be of a much smaller degree and much less a problem than those who have coined this have lead or intend to lead people to think.

· The same structural budgetary issue now

Irrespective whether the structural budgetary issue during the late Howard/Costello government existed or not in the past when they were in government, the Rudd/Swan government has continued or even compounded the same problem, not only in its 2008 budget when few had foreseen the great recession, but also in this budget when it had been crystal clear that the world has been in a sever recession, government revenue had collapsed and budget deficit had occurred and will be rising rapidly.

It might be excusable they did in their 2008 budget possibly because of their ignorance of the problem. But it is another totally different matter now that they have done nothing to correct the problem in Swan budget 09 when everyone knows it is a problem and a big one.

Further it was even more extraordinary that one blames the past as mistakes when they did not know what would happen in future while continuing to do the same when it is known to be a problem.

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