The 2012-13 Budget is historic for two reasons.
First: It details a fiscal contraction of around 3.1 per cent of GDP or $46 billion. That is the Commonwealth underlying cash budget moves from a forecast deficit of $44 billion in 2011-12 to a surplus of $1.5 billion in 2012-13. This is the largest fiscal contraction since WW2 even exceeding the so called "Horror Budget" of Arthur Fadden in 1952-53 which included a 2.3 per cent tightening.
Second, nominal payments actually fall in 2012-13 for the first time since Budget records were kept.
So this Budget is pretty tough huh? Well not really. In fact, not much!
The $46 billion turnaround in the Budget position consists of:
• $22 billion in higher tax receipts/lower payments due a stronger economy. • $7 billion of one-off cash payment shifts ("rephasing") into the current financial year i.e. disaster payments, carbon assistance, local government assistance grants, schoolkids bonus etc. • $5 billion termination of GFC stimulus.
None of the above represents a tightening in policy in 2012-12 which would slow growth. In fact the rephasing of one-off payments (scheduled for release over the next six weeks) will support growth in Budget year.
What's left is around $12 billion (around 0.7 per cent of GDP) in structural tightening since last Budget. Most of this ($7 billion) is due to discretionary tax changes (e.g. mining tax, carbon tax, abolition of tax cuts for small business).
Finally there are only around $5 billion in net discretionary savings from spending cuts in the Budget year (all achieved since last Budget).
Also, Budget 2012-13 reveals that net spending actually rises by $6 billion over the period of the forward estimates out to 2015-16.
So this is not a horror Budget!
Will the 2012-13 Budget stifle growth in the Australian economy over the next 12 months?
Unlikely, because the discretionary tightening is too small and already mostly anticipated by decision makers. Many savings measures are chosen by the Government will not detract from growth in the domestic economy in 2012-13 e.g. reducing overseas assistance. And the one-of cash payments will definitely contribute to growth in 2012. This "so-called" fiscal tightening may also provide more scope for the Reserve Bank to cuts interests rates which can help to lower the $A and assist those parts of the Australian economy not directly benefitting from the mining boom.
Has the Treasurer done enough to repair the structural integrity of the Budget? Perhaps over time.
Our view is that this Treasurer is pragmatic, a gradualist. Rather than plugging the structural budget hole - which Macroeconomics' estimates at around $40 billion (2.5 per cent of GDP) in 2012-13 - in one go - he is attempting to achieve a discretionary tightening by just controlling the growth of overall spending over time.
The Budget says that real spending will rise by 1.8 per cent over the outlook, while the economy will grow at around 3 per cent, which allows for the structural deficit to halve to around $20 billion (1.4 per cent of GDP) by 2015-16.
Wayne Swan tightening fiscal settings by raising more revenue and controlling spending growth. Great!
Key risk. A shock that leads to a rapid decline in Australia's terms of trade. Then the Budget will loose around $30 billion in windfall tax receipts and the Commonwealth budget will head back to large deficits.
So which is better -the Treasurer's gradualist approach or a once-and-for-all tightening of policy settings?