The Mid Year Economic and Fiscal Outlook (MYEFO) released by treasurer Wayne Swann on November 9 shows that Labor is betting on the minerals boom continuing. While admitting that the global economy remains tenuous, and that the whole house of cards could collapse, it has no “plan B”.
“The update forecasts strong growth, falling unemployment and a big pipeline of investment that’s gathering momentum”, Swann said.
Swann acknowledged the global economy remained “fragile”. But glossed over treasury’s assertion that “risks surrounding the global economy have heightened in recent months. Were the global economy to falter, it is likely that Australia would be affected through both financial and trade channels, including through lower prices for our key commodity exports.”
Swann just stuck to his script — growth would be up, unemployment would fall and the federal budget would return to surplus in 2012/13.
The Australian economy’s strength, and the ongoing weakness of the US, has created a problem. The Australian dollar exceeded parity with the US dollar, meaning that mineral-exporting companies paid in US$ were expected to receive less income (measured in A$) than was predicted months ago.
This meant a crash in expected revenue from the Gillard-Swann mining rent tax, which was stitched together after the coup against former PM Kevin Rudd in June. The government now expects to receive $3 billion less from miners than it planned before the election. Swann said he expected total tax from exports to crash by $10 billion by 2013.
But the government’s strategy remains the same — austerity.
Swann said: “The fact that we are on track to come back to surplus is a tribute to the methodical application of our strict fiscal rules which we first announced in February 2009.
“That is: holding real growth in spending to less than 2% a year and, of course, ensuring that the stronger economy feeds through to a stronger budget position by banking all improvements in revenue.”
The economy is expected to grow by 3-4% a year until 2013, but growth in government spending will remain pegged at 2%.
So much for Labor’s election commitment to “ease the squeeze”. There will be no extra money for infrastructure from this government any time soon.
Labor will also defer its “cash-for-clunkers” scheme, which promised to pay car owners to buy new, fuel-efficient cars, and its promise to cut tax on individuals’ savings. But the pressure for Labor to make further cuts is growing.
“The business community believes that now the economy has resumed trend growth there is greater scope to cut government spending in order to reduce the deficit”, Australian Chamber of Commerce and Industry (ACCI) Director of Economics and Industrial Policy Greg Evans said on November 9.
“ACCI believes a root and branch review of government spending is long overdue and now is an opportune time to eliminate wasteful expenditure and rationalise government spending.”
But the ALP is caught. It wants to cut spending and business tax, but has to contend with minority government status and an electorate increasingly seeking a progressive alternative in the Greens. So for the moment, it’s resisting pressure to cut spending more than it already has.
But should the world economy take another tumble, don’t expect cheques in the mail this time; the government will draw the knives and start cutting instead.