As Federal Treasurer Wayne Swan was handing down the 2010-11, sharemarkets were falling, the euro was wiping out all the gains from Monday, oil, copper and other commodities weakened, but gold rose and investors fretted about Chinese inflation and signs the strong economic growth in that economy had peaked.
So like it or not the promise to bring the budget into surplus three years ahead of forecast was well-timed as offshore investors continued to focus on deficits and debt.
Australia isn’t Greece or Spain, but now isn’t time to be waving a red flag at bond markets and other investors with a huge surge in spending.
Mr Swan estimated a $A1 billion surplus in 2012-13, (2015-2016 in last year’s budget) from the estimated $A40.8 billion deficit for the year to June 30 2011 (2.9% of GDP), $A6 billion down on the estimate in November.
Australia’s net debt is forecast to peak at 6.1% of GDP in 2011-12, half the level expected a year ago.
The government will keep a 2% limit on spending growth until the surplus reaches 1% of gross domestic product.
GDP is estimated to grow 3.25% in the year through June 2011, after expanding 2% in the 2010 financial year, and 4% in 2012.
The rollback of fiscal stimulus will subtract 1 percentage point from GDP in the 2010 calendar year and 0.75 point in calendar 2011, the budget said.
The government expects to raise $A12 billion over the next four years by boosting taxes on resource companies to 40%.
To offset higher spending on health care, railways and border protection, the government is boosting taxes on tobacco by almost $A5 billion by 2013-14. (Both measures already announced).
With the deficit shrinking, the government expects to wind back issuance of government bonds to $A56 billion in the year to June 30, 2011, from an estimated $A60 billion in the current year.
The Treasury predicts that Australia’s terms of trade, a gauge of income from exports, will rise to a 60-year high in the fiscal year that begins July 1, boosted by price gains for iron ore and coal exports.
The measure will retreat in 2011-12 as commodity prices “moderate somewhat” with rising production, the budget said.
That echoes the forecasts of the Reserve Bank last Friday.
Treasury estimates inflation at 2.5%, the Reserve Bank said 3%, but they measure it slightly differently.
The government said “unemployment is expected to fall further from 5.3% to 4.75% per cent by mid-2012, around the level consistent with full employment.”
The other key forecasts from the budget include:
Household consumption spending rise by 3.5% next financial year.
That will contribute 1.9 percentage points to the predicted 3.25% GDP growth.
Business investment spending is forecast to rise by 7% in 2010-11, contributing another 1.2% points to GDP growth.
Treasury predicts that employment will grow by 2.25% in 2010-11, pulling the unemployment rate down from 5.3% now to 5% by June 2011.
That is expected to be followed by jobs growth of 2% in 2011-12, which would see unemployment fall to 4.75% by June 2012.
Compensation of employees is forecast to increase by 7.25% in 2010-11 with wages growing 3.75% and the number of people in jobs rising by 2.25%.
Treasury forecasts growth in exports of 5% next financial year, but this will be swamped by even stronger growth in imports (up 9%) meaning Australia’s trade performance will subtract from GDP growth in 2011.
Tax returns will vanish for millions of Australians and savings will be taxed at a lower rate as part of the budget, measures that were suggested in the Henry Review of Tax.
From 2012, taxpayers will be able to abandon the old-style tax returns, opting instead for a $500 ‘standard deduction’ to cover work-related expenses, saving them the cost of an accountant.
The standard deduction will increase to $1000 the following year.
According to the Treasury, the new simplified ‘no tax returns’ system will be available to 6.4 million taxpayers saving them an average $192 each year.
The government will reduce the tax paid on savings, with a 50% cut on the tax charged for up to $1000 earned from savings accounts, bonds, debentures and annuity products.
The government expects 5.7 million Australians to pay less tax in 2011-12 as a result of the measure and says it will especially benefit small savers and older Australians who tend to put non-superannuation savings into interest-bearing accounts.
The banks will benefit, as will annuity sellers such as the AMP and Challenger.
The share prices for the these groups will be under pressure today from the budget and from the return of global fears about debt.
