Influences on the Australian Budget

The role of economic forecasts are crucial in setting a government Budget. As the Treasurer Scott Morrison approaches his first Budget he must consider what is likely to happen in the economy.

This is important because government revenue and spending are affected by the level of economic activity. When growth is slowing, or worse GDP declines, government revenues are lower than expected and government expenditure is higher. This has been the story in Australia since 2011.

The present government, and to an extent the last one, have an irrational (from an economists perspective) desire to achieve a Budget surplus. It would appear that they wish to cut spending to achieve this. However that is the exact opposite of what a government should do when growth is slowing and there is the threat of a recession.

The Committee for Economic Development of Australia (CEDA) have issued a report on the trends in the Australian economy. It makes gloomy reading for Morrison. There will be no strong growth in tax receipts and it would appear there is a good deal more structural unemployment to come.

Worst of all for the Treasurer there is a great deal of uncertainty over currency and commodity markets. Australia depends on commodity exports and the exchange rate will determine the value of those exports. It is likely that once again the Budget figures released in May will be substantially revised during the year.

The Age covers the CEDA report here

This article is especially important to VCE Economics students who must have a firm understanding of events and influences on the Australian economy over the last four years. For both IB and VCE students the importance of forecasting to Budgetary/Fiscal policy is relevant as in the influence of the budget on the real economy.

The tricky problem of the Budget

If you listen to Australia's politicians they will generally tell you that the Australian government spends too much and that is why the Federal government runs a Budget deficit. You shouldn't really listen to politicians.

The problems of Australia's Budget are actually due to both spending and revenue problems. From my point of view far more due to revenue than expenditure.

The article below reports the views of the Treasury Secretary, John Fraser. Mr Fraser is a civil servant and so not bound to give a political point of view. He points out that revenue has continuously been lower than forecast in recent years, and that is why the Federal Budget is further in deficit than various government announcements have predicted.

The article is essential reading for VCE students. It describes the issues facing the Federal Budget and the difficulties of forecasting revenues, which is pretty essential when setting out plans for four years in the future. No government can escape this problem completely.

For Australia the government failed to see the fall in commodity prices which have led to much lower export values and profit taxes. Also growth has slowed which means that taxes on incomes are not rising as fast as hoped. Worse the government failed to tax the resources sector properly during the mining boom.

For those interested in this issue Ross Garnault's book 'Dog Days' is available in all good bookshops and online.

The Age article is here

This article is essential reading for VCE students, but IB students will find it relevant to the issue of fiscal policy.

The year ahead

In the slow news weeks of Christmas and New Year newspapers look back and look forward to fill the space. It provides some useful insights, although rarely are there any predictions which stand the test of time.

The attached article looks at the prospects for the economy for 2013. The analysis is the interesting part - what are the forces at work and how are they expected to affect the performance of the Australian economy and so the standard of living?

Edited highlights:
Growth will continue, but will be slow.
Growth won't be high enough to deliver a Budget surplus.
Monetary policy will react to changes in the real economy, but budgetary policy probably won't.
The Terms of Trade, exchange rate, business and consumer confidence are key factors in determining performance.
World economic activity is key to driving exports, surprisingly only the US and China are mentioned in the article.

Inflation is well under control. A blow to the idiot Abbot who continues to forecast a melt down on this front.

Read carefully, its a great primer for Year 11 or 12, as it summarizes the issues nicely.

The Age article is here