Labor punts on modest debt level

THE Finance Department and Treasury have urged the Gillard government to make big spending cuts. But there were none in yesterday's mid-year budget update. The question now is whether they will come next year or not at all.
On these figures, you could argue there is no need. Treasury estimates that Australia's budget deficit will shrink rapidly over the next two years, and turn into surplus by 2012-13.

If so, we do not have a budget problem which is the almost unanimous view of the ratings agencies, global financial institutions and market economists.

The Coalition argues we should cut spending faster. But yesterday's figures predict government spending will shrink this year by 1.1 per cent of GDP, or $14 billion.

Next year it will shrink by another 0.8 per cent of GDP, more than $10 billion. The following two years will deliver a similar cut between them.

Yesterday's update makes only minor changes to Treasury's economic forecasts and bottom lines. The only real "spending cut" was to put off $400 million of investment in the new rail line through Melbourne's western suburbs.

The forecast peak in Australia's net debt has risen to 6.4 per cent of GDP. Wow. In the US, they're asking whether it will peak this side of 100 per cent.

But in their briefings to the new government, Treasury and Finance warned that achieving the goal of a surplus in 2012-13 would be touch and go, and urged ministers to lock it in by making further spending cuts. Labor did not respond this time.

Will it do so in next year's budget, or just punt on being lucky?