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The 2012/13 Budget and the Australian Economy Moir Group May 9, 2012 John Edwards Visiting Fellow, Lowy Institute The Quiet Boom Australia’s wealth Jobs Manufacturing and mining Household consumption Home building Investment Upswing Mining investment Investment by sector Investment pipeline Household saving Gross Household Saving Housing credit growth Business credit growth Slowdown in employment growth Slower GDP growth Lower inflation Key Budget Measures – Carry back of up to $1m in business losses against tax paid on former profits, from July 1 • Corporate tax cut shelved – Doubling super contributions tax on incomes over $300,000 – School rebates and a dental scheme for low to middle income families – Carbon tax-funded compensation – National disability insurance – Increased family benefit from July 1 2013 The 2012/13 Budget • Returns to surplus of $1.5bn from deficit of $44.4bn, a turnaround of 3% of GDP – Revenue up 1.5% of GDP, spending down 1.6% of GDP • But contractionary impact mitigated – Payments in last months of 2011/12 will be spent in 2012/13 – Some major spending cuts have little domestic impact e.g. foreign aid, defence – Some tax increases have little spending implication e.g. superannuation, corporate tax cut shelved • Major revenue increase from existing tax plus MRRT, carbon tax etc. • Some major program payments to begin next July 1 2013 – $1.8bn increase in Family Tax Benefits A deficit of $44.4 billion (3.0 per cent of GDP) in 2011-12 (Table 1). Table 1: Budget aggregates Actual Estimates Projections 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 Underlying cash balance ($b)(a) -47.7 -44.4 1.5 2.0 5.3 7.5 Per cent of GDP -3.4 -3.0 0.1 0.1 0.3 0.4 Fiscal balance ($b) -51.5 Per cent of GDP -3.7 (a) Excludes expected Future Fund earnings. -42.0 -2.8 2.5 0.2 2.6 0.2 7.0 0.4 9.5 0.5 This Budget spreads the benefits of the mining boom to help over 1.5 million families by growth in private demand. Table 2: Major economic parameters (a) Forecasts Projections 2011-12 2012-13 2013-14 2014-15 2015-16 Real GDP 3 3 1/4 3 3 3 Employment 1/2 1 1/4 1 1/2 1 1/2 1 1/2 Unemployment rate 5 1/4 5 1/2 5 1/2 5 5 Consumer price index 1 1/4 3 1/4 2 1/2 2 1/2 2 1/2 Nominal GDP 5 1/2 5 5 1/4 5 1/4 5 1/4 (a) Real and nominal GDP are year-average growth. Employment and CPI are through-the-year growth to the June quarter. The unemployment rate is the rate for the June quarter. Global financial market tensions eased in the early months of 2012, after the period of Statement 2: Economic Outlook Table 1: Domestic economy forecasts(a) Forecasts Outcomes(b) 2010-11 2011-12 2012-13 Panel A - Demand and output(c) Household consumption 3.1 3 1/4 3 Private investment Dwellings 3.0 -1 0 Total business investment(d) 5.6 18 12 1/2 Non-dwelling construction(d) 8.8 25 14 Machinery and equipment(d) 3.0 16 1/2 12 1/2 Private final demand(d) 3.3 6 5 Public final demand(d) 3.4 1 1/2 - 1/2 Total final demand 3.3 5 3 3/4 Change in inventories(e) 0.5 0 0 Gross national expenditure 3.8 5 4 Exports of goods and services 0.2 4 4 1/2 Imports of goods and services 10.4 12 1/2 7 1/2 Net exports(e) -2.0 -2 - 3/4 Real gross domestic product 2.0 3 3 1/4 Non-farm product 1.9 3 1/4 3 1/4 Farm product 7.1 -6 2 Nominal gross domestic product 8.3 5 1/2 5 Panel B - Other selected economic measures External accounts Terms of trade 20.6 3 1/4 -5 3/4 Current account balance (per cent of GDP) -2.4 -3 -4 3/4 Labour market Employment (labour force survey basis)(f) 2.2 1/2 1 1/4 Unemployment rate (per cent)(g) 4.9 5 1/4 5 1/2 Participation rate (per cent)(g) 65.5 65 1/4 65 1/4 Prices and wages Consumer price index(h) 3.6 1 1/4 3 1/4 Gross non-farm product deflator 6.0 2 1/2 1 3/4 Wage price index(f) 3.8 3 1/2 3 3/4 (a) Percentage change on preceding year unless otherwise indicated. (b) Calculated using original data unless otherwise indicated. (c) Chain volume measures except for nominal gross domestic product which is in current prices. (d) Excluding second-hand asset sales from the public sector to the private sector. (e) Percentage point contribution to growth in GDP. (f) Seasonally adjusted, through-the-year growth rate to the June quarter. (g) Seasonally adjusted rate in the June quarter. (h) Through-the-year growth rate to the June quarter. 2013-14 3 2 1/2 8 7 1/2 8 1/2 4 1/4 0 3 1/4 0 3 1/2 4 1/2 5 1/2 - 1/2 3 3 1 5 1/4 -3 1/4 -6 1 1/2 5 1/2 65 1/4 2 1/2 2 1/4 3 3/4 The sustainability of Government finances has also been improved as many of the budget savings identified deliver continuing benefits to the bottom line beyond the forward estimates. FISCAL OUTLOOK An underlying cash surplus of $1.5 billion (0.1 per cent of GDP) is expected in 2012-13, largely unchanged from the estimate at MYEFO. In accrual terms, a fiscal surplus of $2.5 billion (0.2 per cent of GDP) is expected for 2012-13. Table 4: Australian Government general government sector budget aggregates Receipts(a) Per cent of GDP Actual 2010-11 $b 302.0 21.6 2011-12 $b 330.0 22.3 Estimates 2012-13 $b 368.8 23.8 2013-14 $b 392.5 24.0 Payments(b) Per cent of GDP 346.1 24.7 371.3 25.1 364.2 23.5 387.3 23.7 404.9 23.5 427.3 23.6 3.7 3.0 3.0 3.2 3.4 3.7 Underlying cash balance(c) Per cent of GDP -47.7 -3.4 -44.4 -3.0 1.5 0.1 2.0 0.1 5.3 0.3 7.5 0.4 Revenue(a) Per cent of GDP 309.9 22.1 336.4 22.8 376.1 24.2 402.2 24.6 424.8 24.7 449.6 24.8 Expenses Per cent of GDP 356.1 25.4 373.7 25.3 376.3 24.3 398.5 24.4 416.4 24.2 439.0 24.2 Net operating balance Net capital investment -46.2 5.3 -37.3 4.7 -0.2 -2.7 3.7 1.0 8.4 1.4 10.5 1.1 Fiscal balance Per cent of GDP -51.5 -3.7 -42.0 -2.8 2.5 0.2 2.6 0.2 7.0 0.4 9.5 0.5 Future Fund earnings Projections 2014-15 2015-16 $b $b 413.6 438.4 24.0 24.2 Memorandum item: Headline cash balance -51.1 -48.4 -8.7 -6.8 -0.1 2.0 (a) Includes expected Future Fund earnings. (b) Equivalent to cash payments for operating activities, purchases of non-financial assets and net acquisition of assets under finance leases. (c) Excludes expected Future Fund earnings. Underlying cash balance estimates The increase in the estimated 2011-12 underlying cash deficit since MYEFO is largely a result of changes in economic circumstances reducing tax receipts, as well as new policy decisions that have increased payments including the Schoolkids Bonus and the bring forward of payments for local government services. A small underlying cash surplus of $1.5 billion is expected in 2012-13. The downward revision to total parameter and other variations of just under $2.9 billion since MYEFO has been offset by policy decisions of just over $2.9 billion. The declared strategy “Consistent with the fiscal strategy, the return to surplus is being achieved through a combination of targeted and responsible savings and allowing the natural increase in tax receipts associated with a strengthening economy to flow through to the budget.” Multi factor productivity Labour productivity Capital productivity Contribution to output growth Inputs of capital, labour Gross National Saving Household Consumption Mining output