Friday, March 30, 2012
No Australian government has ever proposed such a huge withdrawal of spending from the economy. On his own published figures, Swan plans to take us from a deficit of $37 billion this financial year, perhaps more, to a $1.5 billion surplus in 2012-13.
On Treasury's estimates, that would take at least 2.6 per cent of GDP out of the economy in 2012-13. That is equivalent to shutting down the entire electricity industry, all arts and entertainment venues and all airline travel for a year.
Why on earth would you do this in an economy that has added just 10,000 jobs in the past year, where the growth rate is just 2.5 per cent, and most of that is in mining and related industries, and with Victoria and south-eastern Australia on the verge of recession?
What Swan is planning for 2012-13 goes far beyond any previous budget cuts. In 1986, the hairshirt Hawke-Keating budget cut away 1.1 per cent of GDP. The first Howard-Costello budget in 1996 took out 1 per cent of the economy.
Labor now pledges to deliver cuts two to three times as large as those landmarks of fiscal austerity - at a time when most sectors of the economy are already going backwards or sideways under pressure from the high dollar and low demand.
Swan says it will be OK because ''the economy is moving back towards trend growth''. Not if you take away 2.5 per cent of it, it won't be.
We heard the same claims made in Britain when its Conservative/Liberal government slashed public spending and forecast that the economy would bounce higher. Instead, it hasn't grown for 15 months and unemployment is now at 8.4 per cent.
Just do the sums. Suppose Treasury forecasts trend growth of, let's say, 3 per cent in an economy when it's already taken out 2.6 per cent of activity. That would imply that it thinks growth would have been 5 to 6 per cent had the budget bottom line remained unchanged. In the position we're in now, that is ludicrous.
Swan's economic case for this hara-kiri is, first, that the economy is ''on the way back up''; second, that it will create room for the Reserve Bank to cut interest rates; and third, that it will ''send a strong message of confidence to investors around the world''.
The first claim is clearly wrong. The second is misplaced: the Reserve already has plenty of room to cut interest rates, given low inflation and low growth. It doesn't need an excuse; it just needs the honesty to admit it was wrong.
And the third case is counter-productive. It is because investors are so confident in Australia that they have driven our dollar to levels that have made Australian producers uncompetitive. That's why Victoria has lost 42,000 full-time jobs since last April.
This budget is Labor's last chance to get it right. Its complacency about the real state of the economy is breathtaking; 60 of its 72 MPs are in the south-eastern states, which are being flattened to allow the mining boom to go full speed without triggering high inflation.
The focus of this budget should be on targeting a stimulus to recharge the south-east, including south-east Queensland.
The risk is that, instead, it will end up with most of Australia in recession, the budget still in deficit and Labor losing power in a landslide.