Reported by By Andrea Hayward Sunday, November 27, 2011
A return to budget surplus will come from tough savings decisions as the European economic crisis wipes off billions of dollars of revenue, the federal government has warned. The government is preparing its Mid-Year Economics and Fiscal Outlook (MYEFO) and is determined to return the budget to surplus in 2012-13, as promised.
Treasurer Wayne Swan and Finance Minister Penny Wong have again urged European leaders to get their house in order after the Australian sharemarket experienced heavy falls last week amid global uncertainty. Mr Swan said many people did not realise that one of the lingering effects of the global financial crisis (GFC) had been a write-down of tax receipts in Australia.
"Government revenues are down by $130 billion over the five years to 2012-13 from the pre-GFC forecast," Mr Swan said on Sunday.
Finance Minister Penny Wong has warned there are no easy savings to be found, hinting at a crackdown on allowances for executives and foreign workers in the government's mid-year budget review.
Senator Wong said the government was charting the right course with the weakness of the global economy in mind but with a view to returning the budget to surplus in 2012-13.
"Equally we need to also recognise that it would be counterproductive to take an axe to the budget in light of global uncertainty," she told the Ten Network on Sunday.
"There is no doubt the current global economy has made it harder."
A reduction in revenue was expected in light of the worsening economic circumstances in Europe and the state of the sharemarket, which is 15 per cent down since the May budget was handed down.
"As a matter of logic that will flow through, for example, to capital gains tax," Senator Wong said.
The government had made $100 billion of savings in the past four budgets and there were no easy savings left to take, the finance minister said.
"So you should anticipate some difficult decisions in the mid-year budget update in the coming week," she said.
The use of tax breaks for top executives and foreign workers using Living Away From Home Allowances to reduce their salaries would be tightened in the upcoming Mid-Year Economics and Fiscal Outlook (MYEFO), News Limited reported on Sunday.
Senator Wong said the issue was raised, in the context of the tax forum, as being problematic.
"Obviously those issues are issues the government is having a very close look at," she said.
Former treasurer Paul Keating said the situation in Europe was "going to hell in a handbasket", with Germany refusing to support the ill-disciplined southern Mediterranean nations.
"This is the worst crisis of my lifetime," Mr Keating told the Ten Network.
“It's a kick in the guts to working families” said Wayne Swan last month when National Australia Bank declined to pass on the full interest rate cut to its customers. Of the 25 basis point cut, NAB held back 5 points for itself. So what would the Treasurer say if he knew there was another culprit costing borrowers across the land an extra 10 to 20 points on their mortgages? “Kick in the guts…who me?”
That's right, the government is costing borrowers billions of dollars a year in fees via the wholesale funding guarantee. By the end of October, Treasury had raised $3.2 billion. And although the scheme was closed to new debt in February 2010, it should deliver well over $5 billion all up by the time the last of the guaranteed liabilities matures in 2015.
It's a rollicking good earner for Wayne - and especially so now, what with the $20 billion budget hole to be unveiled today as part of the widely leaked mid-year economic and fiscal outlook. The government has a strong case to charge the banks for the pleasure of taxpayer backing. No other businesses enjoy the same breaks as the banks. But the banks aren't absorbing the cost. Rather, they are passing it on to their customers.
Cuts to the public service and smaller tax breaks for executives will be crucial for the Gillard government's efforts to deliver a budget surplus next financial year as a global economic slowdown batters expected revenues.
Even with fresh spending cuts, the budget will just squeak into a surplus of $1.5 billion for the 2012-13 year, smaller than the $3.5 billion forecast in its May budget, according to the government's mid-year budget review released this morning in Canberra. Treasurer Wayne Swan said Australia is sending a strong message to the rest of the world by bringing the budget back to surplus.
Never mind the political fixation with a marginal surplus, the middle class welfare nipping here, the tax lurk tucking there, the magic 2.5 per cent productivity bonus expected from Commonwealth agencies, or even the extra half per cent or so being chipped off the economy's growth in the process – in an ugly world, Treasury has come up with what one former treasurer might still call a beautiful set of numbers.
The only dark number in the economic update was that unemployment is expected to tick up to 5.5 per cent by June and stay there for a year, but employment should still grow by one per cent this financial year and 1.5 per cent next. That means more people in jobs earning more money - more customers, if retailers have an attractive enough offer to tempt them.
It's like a bank run, but instead of a panic over one institution this is a stampede out of an entire continent - the world is staging a run on Europe.
The Gillard government has two dangers to confront but had to choose to give priority to one. It could protect growth, or it could protect confidence.
Yesterday Australia chose. The government decided the priority was to protect confidence. By deciding to keep its promise to deliver a budget surplus next year, the government obliged itself to cut some spending.
This is unpopular. Almost 70 per cent in an Essential Media poll on Monday preferred that the government keep up its spending.
But the government has made the right choice. The Polish Foreign Minister, Radoslaw Sikorski, appealed yesterday to the mighty stronghold of Europe's economy, Germany, to save the continent from ''a crisis of apocalyptic proportions''.
Yet the world market has not only lost faith in the most indebted European economies like Italy and Greece - even the bedrock of continental credibility, Germany, is having trouble borrowing.
''Risk contagion to other countries that have relatively solid public finances could massively escalate economic disruption if not addressed,'' the OECD's chief economist, Pier Carlo Padoan, said.
In this world, confidence is king. By pledging to hold the line on the budget surplus, Julia Gillard, Wayne Swan and Penny Wong were protecting Australia's fiscal credibility. They were rewarded immediately.
Even as a credit rating agency, Fitch, issued a warning of a possible downgrade on the creditworthiness of US debt, even as another, Moody's, announced that the rating of every country in Europe was at risk of downgrade, Fitch declared an upgrade to Australia's credit rating to the rolled-gold AAA.
"The use of tax breaks for top executives and foreign workers using Living Away From Home Allowances to reduce their salaries would be tightened in the upcoming Mid-Year Economics and Fiscal Outlook (MYEFO), News Limited reported on Sunday.
Senator Wong said the issue was raised, in the context of the tax forum, as being problematic."
Do these people vote? No, they're foreigners. Are they poor? No, most of them sit at the 99th percentile of income level.
OMG, Wayne, that's a tough budget decision. Think of the (foreign expatriate) children...!!!
Curiously though, NewsCorp saw this as "adding another blow to the nation's competitive edge". Apparently, in MurdochWorld, Australia needs to subsidise foreign nationals to run Australian companies, in order for Australia itself to be competitive. No wonder the Murdochs themselves have become Americans.
THE overall thrust of last week's mid-year budget update was unambiguously good: while most of the developed world is looking bleak or worse, Australia can reasonably expect to continue to grow at around its long-term trend rate of 3.25 per cent - with the one little caveat: that Europe doesn't blow up the global financial system.
It's typical of large parts of the Australian media that there were big efforts to find the glass half full, a fevered search for ''victims'' of the budget's nipping and tucking, instead of recognising what the OECD rates as the developed world's best-performing economy.
But while there was plenty of focus on pockets of ''pain'' and the political fixation with delivering a nominal surplus, what was generally missed was that Treasurer Wayne Swan had nearly halved his jobs growth target from his May forecasts. Instead of the 500,000 new jobs by the end of the next financial year, Treasury is now saying it's more like 287,643.
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