Download Activity - Scepticism surrounds Swan`s surplus scenario

STUDENT ACTIVITY - NOW Economics Issues
Scepticism surrounds Swan’s surplus scenario
In this activity you will:
• describe the trends of Australia’s budget outcomes and public debt;
• analyse relationships between fiscal outcomes, debt and interest payments;
• evaluate the need to return the budget to surplus.
Before completing the activities, you would benefit from knowledge of budgets and fiscal policy. You can find
out more about these in NOW Economics Explained.
According to some, Treasurer Wayne Swan's determination to achieve a budget
surplus in 2012-13 is neither realistic nor appropriate.
When the Treasurer handed down the budget back in 2010-11, he said the government
would return the budget to surplus in the 2012-13 financial year. Despite worrisome trends
since then, he has remained steadfast in this forecast.
The final budget outcome for 2010-11 came in at an underlying cash deficit of $47.7
billion 1, the third deficit in a row. The 2011-12 budget forecast an underlying cash deficit of
$22.6 billion. But updated forecasts in the November 2011 MYEFO now have the
expected deficit at $37.1 billion. 2
The government blames the budget blowout on 'deterioration in the global economy and
uneven domestic conditions...result[ing] in a downward revision of tax receipts by over $20
billion...' 2
Nevertheless, the November outlook statement is still forecasting a return to a small
surplus of $1.5 billion in 2012-13. 2
'It is our aim to bring the budget back to surplus and that's what we intend to do,' said Mr
Swan. 3
But there is scepticism about the chances of achieving this under the expected economic
conditions. This is supported by an analysis from Deloitte Access Economics which
predicts an extra two years will pass before the surplus goal is attained. 4
Others feel a return to surplus in 2012-13 is not even necessary or indeed suitable. Paul
Eslake of the Grattan Institute says 'it would risk exacerbating what would already be a
more fragile economic situation than had been anticipated when the objective of returning
the budget to surplus was initially formulated.' 5 He claims 'the government's insistence
that the budget be in surplus by 2012-13 was rather always a political objective,' he says. 5
Indeed, the government has come under pressure from the Opposition which is keen to
portray the government as poor economic managers. Opposition Treasury Spokesman,
Joe Hockey, is adamant the government is incapable of achieving the target, claiming 'The
Labor Party will never deliver a budget surplus.' 6
There is a feeling amongst some that the government has unnecessarily put its economic
reputation on the line regarding this matter.
January 5, 2012
1. Australian Government 'Final Budget Outcome 2010-11' (2011) @ http://www.budget.gov.au/201011/content/fbo/download/02_Part1.pdf Retrieved January 4, 2012.
2. Australian Government 'Mid-Year Economic & Fiscal Outlook 2011-12' (2011) @ http://www.budget.gov.au/201112/content/myefo/html/03_part_3.htm Retrieved January 4, 2012.
3. Maley J. 'Swan:we're strong in time of adversity' (December 29, 2011) Sydney Morning Herald
@ http://www.smh.com.au/national/swan-were-strong-in-time-of-adversity-20111228-1pcza.html Retrieved January 4, 2012.
4. Kenny M. & Hockley C. 'Promised Labor surplus doomed, says report' (January 5, 2012) Adelaide Now
@ http://www.adelaidenow.com.au/promise-labor-surplus-doomed-says-report/story-e6frea6u-1226187060512 Retrieved January 4,
2012.
5. Eslake S. 'Should we return to surplus by 2012-13? The case against' (August 12, 2011) The Converstaion
@ http://theconversation.edu.au/should-we-return-to-surplus-by-2012-2013-the-case-against-2842 Retrieved January 5, 2012.
6. AAP 'Labor will never deliver surplus: Hockey' (May 4, 2011) Sydney Morning Herald @ http://news.smh.com.au/breaking-newsnational/labor-will-never-deliver-surplus-hockey-20110504-1e7je.html Retrieved January 4, 2012.
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2012
STUDENT ACTIVITY - NOW Economics Issues
Commonwealth Budget Outcomes
Describe the trend of the Commonwealth government’s Underlying Cash Balance over the
period shown.
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2011
STUDENT ACTIVITY - NOW Economics Issues
Economic Activity and Budget Outcomes
I.
Describe the relationship between the underlying budget balance and the level of
economic activity represented by GDP growth.
II.
Account for the relationship with reference to:
a. discretionary budget factors (deliberate decisions by the government concerning
spending or taxation); and
b. non-discretionary factors (structural factors concerning the economic situation).
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2012
STUDENT ACTIVITY - NOW Economics Issues
Financial
Year
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
SELECTED BUDGET FIGURES (annual % change)
Total Tax
Education
Social
Public Debt
Total
Revenue
Expenditure
Security &
Interest
Expenditure
Welfare
Expenditure
Expenditure
-1.6
10.6
3.2
-31.5
6.0
9.5
3.5
5.8
-10.8
4.5
6.7
9.9
10.5
-12.1
4.0
10.4
-4.3
5.5
5.6
9.7
7.0
20.8
1.2
-7.0
0.9
7.1
2.2
7.2
-1.4
7.0
29.3
9.1
5.7
-34.3
25.1
-2.6
22.6
27.3
11.3
15.5
-3.8
54.4
-12.3
59.7
4.5
7.8
-8.0
7.2
47.1
5.0
(Data Source: Reserve Bank of Australia, Table E1)
III.
The table above shows selected data from Commonwealth budgets. Identify
evidence in the table that supports the following statements:
a. The Global Financial Crisis that hit in 2008 had a structural impact on government
revenues.
b. In response to the downturn in economic activity brought about by the GFC, the
government took discretionary spending action.
c. Non-discretionary factors also affected government spending during the GFC.
d. Higher levels of government spending continued into 2010-11.
Public Debt
The budget figures table also includes data on public debt interest expenditure. Identify
and explain the link between this data and:
a. the Underlying Budget Balance shown in the graphs; and
b. the level of Government Net Debt shown in the graph below.
©
2011
STUDENT ACTIVITY - NOW Economics Issues
The Surplus Goal
I.
With reference to data in the graph below, describe the relative level of Australia’s
public debt.
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2012
STUDENT ACTIVITY - NOW Economics Issues
II.
Identify data from any of the graphs which:
a. support urgent return to a budget surplus; and
b. do not support urgent return to a surplus.
III.
Suggest three advantages and three disadvantages of public debt.
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2011