Michael Stutchbury, Economics editor From: The Australian May 11, 2011 12:00AM
THE inadequacy of Wayne Swan's fourth budget has left Australia highly vulnerable to the gathering risks in the global economy, punting everything on our China luck continuing to hold.
Australia already has spent more than this China luck has delivered in the form of a 170-year high in our terms of trade and record high mining export prices. This includes the blowout in Swan's current-year budget deficit to just under $50 billion or 3.6 per cent of gross domestic product.
Even assuming our China luck will hold, the budget will only just scrape into the black in 2012-13. And the surplus will remain below 1 per cent of GDP for the following two years.
That is, Labor offers no prospect of building up a solid surplus or "stabilisation" fund that could be kept in reserve to cushion the economy when it next turns down. He's ruled out any fair dinkum tightening of budget policy at the top of the biggest commodity price boom in Australian history. Remember, as a post-election budget this is the one that is supposed to be the tightest in the political cycle.
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Budget 2011 - live reaction and analysis Adelaide Now, 22 minutes ago Budget shows reliance on China boom Herald Sun, 10 hours ago We must be ready for downturn The Australian, 1 day ago Budget's blanket coverage a test Herald Sun, 1 day ago Budget special: Can you fix it? Adelaide Now, 2 days ago
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Swan last night trumpeted $22bn worth of cumulative "savings" over four years, claiming they would "strengthen our structural position over time". But the biggest part of the 2011-12 "savings" - $1.7bn out of $3.8bn - will be the temporary flood levy.
More importantly, the budget also adds $19bn of extra "spends" over four years, including on new digital TV set-top boxes for pensioners. So it has actually improved the budget bottom line by less than a cumulative $3bn over four years when excluding such murky "savings" as the "contingency reserve offset". And that's out of a $400bn annual budget.
The Treasurer makes a lot of his 2 per cent cap on real government spending growth. "The government has kept real growth below 2 per cent for the five years from 2010-11 to 2014-15," the budget asserts in confusing what it promises to do with what it has actually done.
What Labor has actually done is jack up real government spending by 22 per cent in its first three years, including the single biggest annual outlays boost since the Whitlam government. And that included some of the most wasteful programs in Australian history.
So some serious belt-tightening is overdue.
Swan also claims to be delivering Australia's fastest "fiscal consolidation" on record, but that's largely because the budget is being swept up in one of its sharpest export price upswings. Much of the improvement in the bottom line is "cyclical" rather than "structural".
That also means the promised 2012-13 headline surplus will mask an underlying or "structural" deficit that Treasury itself has estimated will not be eliminated until the end of this decade.
Such "structural" estimates seek to measure where the budget bottom line would be if commodity prices were at their medium-run average rather than at 170-year highs. Think of it as the sustainable budget bottom line.
Treasury is back-pedalling furiously on its structural budget estimates, after publishing them two years ago. Yes, it's difficult to estimate where the China-fuelled upswing in commodity prices will settle, but that puts the onus on the budget to properly spell out how the bottom line would fare if our China story takes a turn for the worse.
The budget's "sensitivity analysis" on this remains woeful, finding that a piddling fall in the terms of trade would hardly damage the budget bottom line at all over two years. The question, however, is what would happen in four or five years after a sizeable slump in the terms of trade.
This is quite a plausible scenario given Treasury's own discussion of the "significant risks" in the global economy that, if realised, would have "serious negative implications" for Australia. And it warns that our record high terms of trade also are more likely to lead to "heightened volatility and large adjustments".
The biggest global risk is bubbling inflation stoked by the US Federal Reserve board's super-loose monetary policy and Washington's currency war with Beijing. This already has powered Australia's iron ore and coal prices to new highs. But it also is showing up in higher inflation in China and elsewhere in Asia. Getting this inflation under control could lead to a sharp slowing in growth, the budget warns.
The wham-bam of a global inflation breakout followed by a China-led economic slump could come as Australia is struggling to prevent its biggest ever mining investment from generating a wages breakout. Swan's budget counters the risk of mining boom skilled labour shortages by throwing money at skills training, toughening up welfare rules and partly reversing Labor's previous cuts to the immigration intake.
While these may all be good, the mining boom's biggest inflation threat comes from Labor's own reregulation of the job market, including the re-empowering of the old award system, the unions and the industrial tribunal.
The threat of rising wage inflation is why the Reserve Bank has signalled that it will start lifting interest rates in the next few months, whatever Swan delivered last night. Remarkably, the likelihood of rising interest rates is hardly mentioned in the budget's lengthy discussion of the economic outlook and cost of living pressures.
