suprise suprise !!!

PM Julia Gillard warned of threat to surplus plan

* David Uren, Economics correspondent
* From: The Australian
* October 02, 2010 12:00AM




THE Gillard government has been warned it will struggle to achieve its key economic goal of a budget surplus in 2012-13.

It could achieve this only by making cuts to government spending and implementing a new reform agenda on productivity.

In a blunt assessment of the state of the government's books as it took office last month, the Finance Department declared: "The government's fiscal policy objectives will be difficult to achieve."

The warning is contained in the department's "Red Book" incoming government brief to the new Finance Minister, Penny Wong, which was released under Freedom of Information laws late yesterday.

The brief calls for a sweeping reform agenda and demands immediate details of savings measures from government ministers.

Senator Wong has been given a savings hit-list that includes: dumping the government's commitment to keeping defence spending growing by 3 per cent a year for the next 20 years; tightening eligibility for the pension; and denying people access to their superannuation for at least five years.

Social welfare is another area slated for savings. The brief said the Howard government reforms to the disability support pension had failed to encourage recipients to take on work and new reform was required. The department backed the Henry tax review's call for reforms to income support payments to reduce workplace disincentives, saying this should be on the agenda of the promised tax summit.

The Finance Minister said the Red Book underscored the importance of the government's fiscal strategy.

"The government will work with the new parliament to deliver this fiscal strategy in the national interest," Senator Wong said.

"In the past three budgets, we've made $83.6 billion in savings to meet the cost of key reforms, and we intend to continue that discipline."

The Finance Department has put savings to pay for the unfunded $2.4bn in commitments to the independents and the Greens at the top of its hit-list, and said these should be identified in time for the mid-financial year budget update, due by the end of the year.

Education Minister Peter Garrett and Industry Minister Kim Carr should be required to present cabinet submissions on the election promises for reward payments to teachers and the cash-for-clunkers rebate within a month.

Although the government has dismissed talk of a renewed economic downturn, the department says it is a real risk, and builds the case for bigger budget cuts.

"The persistent threat of a 'double-dip' global economic downturn strengthens the case for a rapid fiscal consolidation to build a fiscal buffer in the event of a further negative economic shock," the department said.

Even if the economy grows as forecast by Treasury, the Finance Department said "there are pressures on the fiscal position, including on delivering a surplus in 2012-13 and beyond".

The government's target of containing spending growth to no more than 2 per cent a year is easy enough while spending on stimulus projects is being wound down, but the department warned it would become more challenging after that. The long-term record shows spending rising by 3.2 per cent a year.

The department blacked out from the public document the savings that would be required in 2014-15 to meet the 2 per cent target, but it would appear to be at least $5bn.

There are billions more in unbudgeted costs from the pharmaceutical benefits scheme and the Murray-Darling Basin Plan that have not been included in the forward estimates.

The rapid rise in the number of boatpeople is among the pressures on the budget, with the forward estimates assuming a much lower caseload than the 4569 in detention at present.

The department said achieving the surplus figure in 2012-13 was partly dependent on the uncertain price that might be received for the sale of spectrum licences.

Getting the budget back to surplus "will require the government to find additional savings and restrict new spending once its election commitments are provided for".

Although the department put the net cost of the government's election promises and savings over the next four years at only $107 million, it said this did not include the promises made to the independents after the election.

"To maintain the government's fiscal strategy, offsets in the order of $2.4bn will need to be found," the brief said.

The department suggested the government use its difficult budget position to jettison its commitment to keeping defence spending growing by 3 per cent a year for the next 20 years.

"The scale of the fiscal task ahead and the very large enhancements to defence and national security funding in the last decade present the opportunity for the government to reassess the strategic posture and funding of defence," it said.

The ageing of the population requires tough reforms, the department said.

"Measures such as tightening eligibility for the pension and increasing the superannuation preservation age to the age pension age would improve the long-term fiscal sustainability of the system."

At present, people can access their superannuation at 60, while the pension age is being slowly raised to 67.

The department said the level of public support for health spending was not sustainable.

"There will be a need to address whether the comfortably off in the community (and their inheritors) should continue to have their health and aged care services subsidised to the current extent by taxpayers, many of whom are in less fortunate circumstances," the brief said.

As well as tackling reform, the department said there was a case for better governance.