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Economy

Budget surplus is the right approach

“Returning the budget to surplus is the right approach and the Government should be aiming to get back to surplus in the medium term,” Australia and New Zealand Banking Corporation, Senior Economist, Craig Michaels told a CEDA audience in Melbourne.

"Returning the budget to surplus is the right approach and the Government should be aiming to get back to surplus in the medium term," Australia and New Zealand Banking Corporation, Senior Economist, Craig Michaels told a CEDA audience in Melbourne.

He said the economy hasn't been growing as quickly as expected, and now wasn't the right time for the Government to be putting pressure on the economy by cutting spending and raising revenue.

But this "medium-term strategy is the right one, by getting back to surplus and gradually paying down the net debt," he said.

"The reason we got through the Global Financial Crisis (GFC) unscathed is that we were in a very good budget position. We had been running surpluses, benefiting for the commodities boom... and this enabled us to throw cash at the economy.

"Surplus in the medium term gives us the scope to do it again if we need to."

Mr Michaels warned that we might see another GFC type event come out of Europe and this will be damaging for growth.

He said the European crisis late last year had contributed to volatility in financial markets leading to a fall in confidence, demand and commodity prices.

"This has damaged corporate profits and company tax revenue in Australia," he said.

As a result, this year's surplus has blown out by about $7 billion, he said.

"Tax revenue has been growing more slowly than it did in the GFC ... and the capital gains tax share of the economy has fallen," he said.

"(As) the mining sector and related sectors expand, other sectors have to grow more slowly to make room for that without allowing inflation to get out of control.

"The changing industry mix means company revenues are lower than they usually would be, and this is putting pressure on the budget in the medium term."

Mr Michaels said he expected business investment to grow at a rapid pace over the next couple of years.

"Having low business investment could be a kicker for business projections in terms of revenue as the surplus would be a risk," he warned.

Mr Michaels praised the Government on its conservative risk management approach on trade forecasts which is mainly driven by prices of iron, coal and ore, and can be hard to forecast.

He told attendees there had been a fall in expected revenue, and spending cuts had been made in areas such as:

  • Defence - cutting $34 billion from spending;
  • Reducing foreign aid spending by $3 billion;
  • Targeting higher income earners and business with changes to superannuation, concession and fringe benefit taxes; and
  • Keeping the company tax rate at 30 per cent.

"The revenue from the mining tax was meant to pay for the company tax rate cut, but now the Government will take this revenue and use it to fund increases in welfare payments to lower and middle income earners," he said.

He said $34 billion of savings will be used to increase spending on areas including:

  • Welfare payments;
  • Changes to family tax benefit A;
  • The school bonus; and
  • Income supplements for welfare recipients.

Mr Michaels acknowledged that although this is a Labor style budget, "with the redistribution of income, increase in social spending and investment in a new national insurance and dental scheme, these are good areas to be investing in," he said.

Herald Sun, Financial Columnist and Associate Editor, Terry McCrann disagreed stating the objective of this budget was more about the politics than the economy.

He said the budget was generating revenue for redistribution to compensate for the carbon tax and creating a divide between high and lower income earners.

Mr McCrann also said the economic forecasts for surplus were based on assumptions of continued growth in the Australian economy and strong Chinese growth with recovery being made in the US and Europe.

These assumptions are not a strong basis for forecasting he said, with growth expected to underperform overseas, affecting the Australian economy.

The Government needs to keeps its promises of a surplus in 2012-13 and in the outer years, he said.

Mr Michaels said the Government's general targets for returning to surplus were the right ones and this demonstrated good fiscal management.

"It gives global market investors confidence in Australia's fiscal management," he said.

"The triple A credit rating for Australia is secure ... Australia is increasingly attractive to overseas investors."