2010-11 Budget Preview - Australia's Beige Budget

Australia Economic Research

2010-11 Budget Preview - Australia's Beige Budget

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• Treasurer Wayne Swan delivers Australia’s annual budget Tuesday night. Aside from setting the scene for the election ahead, the government’s primary objective in this budget will be to project an aura of fiscal responsibility. Announcing an earlier planned return to surplus will be critical here. Indeed, doing so will reinforce the considerable economic management credibility the government earned by appearing to steer Australia’s economy through the global recession with minimal damage.

• The alternative, a spendthrift budget laden with pre-election goodies, no doubt would win a few stray votes, but would undermine the government’s advantage over the Opposition in opinion polls as better managers of the economy. Also, boosting public spending by too much could make the RBA even more inclined to push the cash rate into restrictive territory.

• With the election looming and opinion polls tightening in favour of the Opposition, however, the Budget will include modest sweeteners that government officials hope will boost their chances of reelection. There already is another round of (modest) personal income tax cuts on the way from July 1, and there will be measures such as quarantining interest earned on bank deposits from taxation. There probably will be changes to healthcare arrangements, but also broad expenditure savings across many portfolios.

• The imminent election means the government, whose officials say the Budget will have “no frills”, will steer clear of politically sensitive measures like a rise in “vice” taxes on gambling and alcohol, and higher taxes on petrol.

• The good news for the government is that the unexpectedly robust economy means the Treasurer will announce a significantly improved fiscal position, relative to the last forecasts published in November. We forecast a headline Budget deficit of A$27 billion for 2010-11, significantly below the government’s previously published estimate of A$46.6 billion, which likely will remain elevated this week.

• The Treasurer probably will announce smaller Budget imbalances over the forecast horizon, including a small surplus in 2012-13, three years earlier than first projected. The lower peak in government debt means there will be a substantial reduction in projected CGS bond issuance.

ENDS

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