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Budget – economic rabbit

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by Peter Switzer

The Prime Minister, Kevin Rudd, has turned to the one part of his reign that he could argue he has got right — the economy — to try and rebuild his credentials to lead, as well as his popularity.

All Treasurers love to pull a rabbit out of a hat to win positive headlines in the media the next day and the budget deficit for next financial year of $40.8 billion is the rascally rabbit this year.

And this trick was reinforced by the net debt figure, which is forecast to peak earlier and lower than expected at 6.1 per cent of GDP, or just over $90 billion, in 2011-12.

That’s less than one-tenth the average of the major economies, the Treasurer boasts and that’s a biggie to crow about in a world challenged by governments weighed down by debt.

Challenge ahead

Sure, Labor was lucky to be in this position. The books were in surplus when they took control. China was a big help and the Reserve Bank’s 4.25 per cent cut in interest rates helped the Government’s stimulus package.

The challenge now is to bring the debt under control and not over-stimulate to make the Reserve Bank go even harder with interest rate rises. And while they have not done enough to check the RBA’s rate rises, it’s hard to argue that this Budget will make matters worse.

Budget in review

So, what are the big calls or forecasts and can we trust them?

The deficit is forecast to be $40.8 billion next financial year, but the budget would return to surplus – a modest $1 billion – in 2012-13 — three years ahead of last year’s prediction!
Net debt is forecast to peak earlier and lower than expected at 6.1 per cent of GDP, or just over $90 billion, in 2011-12. That’s less than one-tenth the average of the major economies.
Unemployment to five per cent by the end of the next financial year and to 4.75 per cent by mid-2012. Last year’s tip was 8.5 per cent!
Economic growth to 3.25 per cent for 2010-11 and then to four per cent in 2011/12!
Business investment and the household sector are crucial.
Household consumption to increase and give 1.9 per cent to the 3.25 per cent growth of GDP.
Business Investment to increase by seven per cent in 2010-11.
Wages up by 3.75 per cent.
Inflation up by 3.25 per cent (headline) this 30 June but going to 2.5 per cent next June!

For advice you can trust, contact Switzer Financial Services.

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Published on: Wednesday, May 12, 2010