Care urged in getting budget to surplus

The federal government will need to be careful not to dampen economic growth too much in putting the budget on track to surplus.

AMP chief economist Shane Oliver said initiatives already flagged or speculated such as cuts in spending and the proposed debt levy would be equal to 0.5 per cent of gross domestic product (GDP) in 2014/15.

He said that would reduce economic growth by about a quarter of a percentage point down to between 2.75 per cent and three per cent.

“The impact of it would be that it would constrain the recovery in growth, back towards trend,” Dr Oliver said.

“It’s a difficult balancing act, I agree with the government that we need to get the budget under control.

“I still remain in a state of shock that after our biggest boom in our history it’s in such a mess.”

Dr Oliver is also concerned about a debt levy being imposed, which reportedly would tax those earning over $80,000 an extra one per cent a year for the next four years.

Average yearly earnings for adult full-time employees was $78,000, the most recent figures from the Australian Bureau of Statistics showed.

“I think if add it all up, then you get about $4 billion, which is the growth in retail spending one might have expected in the year ahead,” Dr Oliver said.

UNSW’s Australian School of Business visiting professor Raja Junankar said the problem with the federal budget’s bottom line is not with spending but with revenue.

“In 2002, as the mining boom took hold government revenue was 25 per cent of GDP,” he said.

“In 2013 it is 23 per cent, which does indicate that the Australian economy is finally slowing down as the resources boom comes to an end.”

Professor Junankar said Australia’s budget position is not as bad as the government makes it out to be.

“OK, we might be a little way off a budget surplus at the moment, but Australia is doing far better than most of the countries of the OECD which are still suffering from the global financial crisis,” he said.

National Australia Bank head of research Peter Jolly said the government is right to put the budget on path to surplus in the coming 10 years.

“It’s relevant that the budget consolidation will be softened by an uplift in infrastructure spending which is a balance sheet item and normally sits outside the budget and is mostly done at the state level,” he said.

“All up, while we still need to see the budget details it’s likely that fiscal policy will be a manageable half a percentage point of GDP headwind for the economy over the next one to two years.”

The government’s mid-year economic and fiscal outlook (MYEFO) in December showed that the 2013/14 deficit was going to be $47 billion, which is three per cent of GDP.

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