The 2011-12 Budget: making insufficient room for the expected boom?

In an economy forecast to recover this year, and then grow quite strongly in later years, with the unemployment rate falling to a forecast 4.5%, the shorter-term stabilisation policy role of the Budget becomes crucial.  In my opinion, this is the most important ‘big picture’ role for annual budgets.

Given the official forecasts on which it rests, the primary task for the 2011-12 Budget should be to ensure that growth in aggregate demand for Australian goods and services, does not run ahead of growth in supply. 

Official forecasts are for a labour market so tight, overall, as to trigger much-increased risks of an inflation breakout, fuelled by wage demands in excess of (currently very poor) productivity growth.

This process has already begun as industrial disputes in support of large wage increases spread across key sectors, including stevedoring and transport.

At present, balancing Australian demand and supply, must take short-term priority over supply side-enhancing initiatives, where these objectives are in conflict.  A much better option is to implement productivity-enhancing supply side initiatives, but within an overall Budget setting that keeps a lid on overall demand growth in an economy expected to be growing very solidly overall.

Macroeconomic policy management at present requires Budget policy decisions reducing aggregate demand, by more quickly moving back into surplus than the Budget would do without such decisions.

What has been the ‘bottom line’ impact of new policy decisions announced as part of the 2011-12 Budget?  In summary:

• Savings estimated at $21.7 billion (over the five years to 2014-15!) have been announced.
• New spending totalling $19 billion (over the same period) has also been announced.
• Between 2010-11 and 2012-13, the net swing towards surplus of new Budget decisions (excluding natural disaster spending) has been about $4 billion.  Actually, tightening does not begin until 2012-13.  In the two previous financial years, net new policy decisions add to the Budget deficit and aggregate demand.
• The trumpeted ‘back in black’ return to Budget surplus relates to ‘headline’/’underlying cash’ Budget balance measures.  It does not relate to the ‘structural’ Budget balance that removes cyclical effects on the Budget.  Based on various estimates by different groups, that remains firmly in deficit (maybe to the tune of around 2% of GDP in 2012-13).  This hardly seems sensible given the boom conditions assumed in the Budget.

On the official estimates for the Budget bottom line, we will see a $52.9 billion swing from a deficit of about $49.4 billion in 2010-11 to a surplus of $3.5 billion in 2012-13. 

Of that swing, about $4 billion, or less than 8%, is due to net ‘tough’ Budget policy decisions.  The rest is due to other forces, notably assumed economic strength both overseas and in Australia, boosting Budget revenues and easing pressures for more spending (e.g., on unemployment benefits).

The 2011-12 Budget is hardly ‘tough,’ pre-Budget spin to that effect notwithstanding.  Net Budget decisions make a very small contribution to returning the Budget to surplus.  They amount to ‘fine tuning’ of the most delicate kind, at a time when a more robust approach to keeping a lid on demand seems needed.

It is from this third perspective that, in my opinion, the 2011-12 Budget is likely to prove most deficient.