Who says one state can't phase out stamp duty?

Stamp duty on conveyancing will be phased out, insurance taxes abolished and payroll tax cut, in pathbreaking tax reforms adopted yesterday in the Australian Capital Territory.

While the Federal government has shelved the Henry tax review’s reform plans, the ACT government has seized on them in a bold set of reforms that shifts its tax burden to property rates.

A minority Labor government supported by the Greens, the ACT government commissioned its own tax review, headed by former ACT Treasurer Ted Quinlan, which came out with proposals broadly similar to those of the Henry report.

Its tax reforms are the first of their kind in Australia, shifting the weight of taxes from transactions to land — in this case, using rates rather than land tax.

They also introduce new forms of Labor’s Robin Hood reforms — hiking taxes on the well-off and cutting them on the hard-up and middling.

Under the reforms set out yesterday by the territory’s Treasurer, Andrew Barr:

* Stamp duties on conveyancing (transfer of property) will be phased out over 20 years, starting today.

* All taxes on insurance will be phased out within five years, starting from July 1.

* The threshold for firms to pay payroll tax will be lifted to $1.75 million, almost three times Victoria’s level.

* Land tax on commercial properties will be abolished.

* Land tax rates will be lowered for 75 per cent of homes, but raised on properties in the top 10 to 15 per cent of the market.

* To pay for all this, rates will be hiked for households and businesses alike, and made more progressive, with rates rising steeply on properties with a high land value.

Mr Barr said the reforms are fairer, simpler and more efficient. ‘‘Tax bases around Australia – including in the ACT – are unsustainable’’, he said.

‘‘The cost of some essential services, notably health care, is rising faster than the rate of economic growth, and the GST base is eroding. Land sales are a finite resource. Further, our taxes are inequitable, volatile and inefficient.’’

The reforms will reduce stamp duty on the sale of a typical $500,000 home by $2450 overnight and by $7000 over the next four years. (Canberra’s median prices are similar to Melbourne’s, but you get more house for the same price).

The new rates system will combine a flat charge of $555 for all households with a new system of four tax brackets ranging from 0.22 per cent to .41 per cent. Rates on a property with a land value of $ 1 million will jump more than 50 per cent.

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Abbott is a Keynesian, after all

WITHIN weeks of a projected surplus being announced, the political argument has quickly turned back to the possibility of the budget falling back into deficit.

The government leapt onto Tony Abbott's comment on Nine's Today that he accepted "that in a crisis the so-called automatic stabilisers will operate to change the overall fiscal position".

Mr Abbott was commenting on Treasury secretary Martin Parkinson's evidence to a Senate committee this week when he indicated Treasury had been planning what it would do if European events generated a new crisis. Dr Parkinson said that while Australia's budget position was "incredibly healthy" by global standards, if the collapse of the euro leads to panic on financial markets, as in 2008, then "it's a different world all bets are off".

"We could if necessary go back into deficit to support activity," he said.

A spokesman for Treasurer Wayne Swan said that despite all his "bluster" about deficits, "Mr Abbott is talking about being in deficit himself. Of course it's no surprise to hear Mr Abbott talking about the Liberals going into deficit given the shadow treasurer has announced a $70 billion crater in the Liberals' budget that he needs to fill to achieve a surplus."

But Mr Abbott rejected the government's interpretation of his comment. "The Coalition's commitment is to have a budget surplus in year one and subsequently," his spokesman said, claiming that Mr Swan had refused to commit to delivering a surplus this financial year.

Asked by journalists whether it would be acceptable if the government, needing to adjust to international conditions, did not deliver a surplus, Mr Abbott said later: "It's never acceptable for governments to break solemn pledges.

"This government has been pledging for months now that no ifs, no buts, it will bring the budget back to surplus. Now, they shouldn't break that commitment.

"My fear is that they are preparing the ground to abandon that commitment and, let's face it, Wayne Swan has been much better at predicting a surplus than delivering one."

Mr Abbott would allow Mr Swan no leeway if there was another global economic crisis, or another natural disaster.

"There was no fine print to Wayne Swan's commitment," he said. "There was no escape clause. He made a solemn pledge again and again to Australians that the government would deliver a surplus . . . Now for him to break that commitment would be yet another sign that you just can't trust this government to manage our economy."

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NZ budget: toned down

THEY'RE like us, but different. New Zealand's 2012-13 budget cracks down on tax breaks for "baches", axes tax breaks for childcare and frozen subsidies, and hikes repayment rates for student loans to stick to its target to get the budget back in surplus by 2014-15.

In a budget criticised by commentators as dull and contractionary, Finance Minister Bill English also promises New Zealand its own Future Fund, financed by the sale of minority stakes in Air New Zealand and four electricity generators.

The budget is mostly normal. It raises more than $A1 billion from tax and revenue rises, and $A1.75 billion of spending cuts, and spends it in health and education, fixing the country's rail freight lines, and rebuilding Christchurch after the earthquake.

The bottom line ends up where it started, with net new spending of just $A20 million over four years, and a deficit edging down from $NZ8.4 billion ($A6.5 million) this year to a tiny surplus of $NZ197 million by 2014-15 all going well.

Last year's ambitious forecasts have been slashed to predict growth averaging 3 per cent over the next four years. Net debt is forecast to peak at 28.7 per cent of GDP in 2013-14, compared with a peak of 9 per cent forecast in Australia.

Next year's deficit is forecast as $NZ7.9 billion, with more than $NZ2 billion, 1 per cent of the country's GDP, being spent to rebuild Christchurch and other earthquake-damaged towns.

The tax rises primarily hit smokers and tax avoiders. Excise duties on cigarettes will rise 10 per cent above inflation for each of the next four years. And as in Australia, the government will be hiring more tax investigators to stamp down on avoiders.

But the budget also took on some sacred totems. New Zealanders renting out their holiday homes (or baches) will no longer be able to write off the full cost against tax. Tax credits for childcare, housekeepers and low-income earners will all be scrapped; Revenue Minister Peter Dunne said the threshold for the low-income-earner credit is so low that no full-time workers now qualify. And with the government under far less pressure than in Australia, the budget could tackle some long-term issues above all, Prime Minister John Key's crusade to tackle inherited welfare dependency, particularly high among Maori and Pacific Islanders.

The budget freezes subsidies for childcare centres in most of New Zealand and invests the money saved to set up new centres in disadvantaged areas, put $NZ1 million aside to provide "long-acting reversible contraception" to young women at risk, and pump more money into youth services and welfare-to-work.

The initiatives come out of two reports Mr Key commissioned into why New Zealand has the OECD's highest rate of youth suicide, and so much inherited welfare dependency. Both reports told him that early intervention to keep young people out of trouble is far more successful and cost-effective than anything you try to do once they're in it.

You can't imagine Julia Gillard or Tony Abbott giving these issues priority over those that chime with focus groups. But Mr Key who grew up on a welfare housing estate in Christchurch before making millions as a foreign exchange trader set himself three targets to meet:

98 per cent of young Kiwis to be in early childhood education by 2018 (up from 94.7 per cent now).

85 per cent to successfully complete school by 2017 (up from 68 per cent now).

Reduce the proportion of prisoners reoffending by 25 per cent by 2017.

"We firmly believe that people who can work, should work," Mr Key said.

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Government bond issues to plummet

NEW issues of Australian government securities will shrink sharply in the new financial year, with net new issues falling from $44 billion this year to just $9 billion in 2012-13.

The announcement by the Australian Office of Financial Management could put further downward pressure on Australian bond yields, which have fallen to record lows as investors flee the stockmarket and Europe.

Tumbling bond yields have already slashed $600 million off the government's estimated interest bill for 2012-13, and $2.4 billion off the forecast bills for the next two years.

It came as the opposition attacked the government's decision to raise Australia's debt ceiling by a further $50 billion.

The increased debt limit was not mentioned by Treasurer Wayne Swan in his budget speech.

But an appropriations bill, introduced on Tuesday night after the budget, would increase the nation's credit limit from $250 billion to $300 billion.

The opposition seized on this yesterday as its main attack on the budget. Opposition Leader Tony Abbott called it "really extraordinary", saying it "gives the lie to Wayne Swan's talk about a surplus".

Shadow treasurer Joe Hockey asked why the Commonwealth needed to raise its credit card limit.

"If they really are delivering a surplus and that surplus is meant to pay down debt, why did they need to increase the allowable borrowings of the Commonwealth government to $300 billion?" he asked.

But Mr Swan said the government was acting on the advice of the AOFM, the Treasury agency that runs Australia's debt finance. He said the AOFM wanted the rise to give it a "buffer" against a temporary financing challenge.

"What tends to happen is that government revenues come in big lumps towards the end of the year but government expenditure goes out evenly across the year. Secondly, we also have to retire bond lines as we bring new ones on," Mr Swan said.

The government has yet to decide on or publish a report by senior Treasury, Reserve Bank and AOFM officials urging that after the budget returns to surplus, gross government debt should be kept at 12 to 14 per cent of GDP about $200 billion now to maintain a liquid market for trade in bonds.

Yesterday the AOFM announced that gross issuance of new Treasury bonds would shrink from $58 billion this financial year to $35 billion in 2012-13.

They will include a new line of bonds maturing in 2024, to be launched early next year, and a new 15-year bond to be launched a bit later. A further $2 billion of Treasury indexed bonds will also be issued, and short-term Treasury Notes as required.

The AOFM also floats the possibility that some Aussie Infrastructure Bonds used to finance NBN Co's investments might be raised in the same process.

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More cuts may be necessary: Swan

AUSTRALIA could face further spending cuts and/or revenue rises this year and in 2013 after Treasurer Wayne Swan pledged to make more budget savings if weaker-than-expected economic growth imperils his promise of a budget surplus.

As the ratings agencies warned that the budget's economic forecasts are ambitious and might not be reached, Mr Swan told the National Press Club that Labor would cut further if the budget looked like failing to reach its target of $1.5 billion.

His decision, announced as a curt one-word answer "Yes" to questions on the issue, sets Australia at odds with the International Monetary Fund, which is advising governments in such situations to let their fiscal position take the hit rather than weaken the economy.

"Countries need to keep a steady hand on the wheel," IMF managing director Christine Lagarde said in Zurich on Monday. "If growth is worse than expected, they should stick to announced fiscal measures, rather than announced fiscal targets.

"In other words, they should not fight any fall in tax revenues or rise in spending caused solely because the economy weakens."

Ratings agencies gave the budget the thumbs-up, declaring it consistent with Australia retaining its AAA rating. But they issued caveats on the economic targets, implying Mr Swan's resolve may be put to the test.

Standard & Poor's credit analyst Kyran Curry said the forecast return to surplus "will provide flexibility to respond to large economic and financial shocks, and the forecast peak level of Australia's debt was "well below that of most peers".

"However, this strategy relies on an accommodative economic outlook that remains highly uncertain, and the support of coalition partners for the minority government's austerity measures," Mr Curry said.

Moodys vice-president Steven Hess said that while Australia's low debt gave it "considerable flexibility in the timing of a return to surplus", its economy was a heavy borrower from global capital markets and it was important to see "a substantial positive move in the government's fiscal position".

But he warned that "the fiscal correction of about 3 percentage points of GDP in 2012-13 will be a drag on economic growth", and raised doubts about "whether the targeted budget surplus is ultimately achieved".

Fitch Ratings put a similar view, calling the government's plans "positive", but adding they "could be challenging, particularly if the economic outlook weakens further."

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It's a political budget, a fake budget

THERE comes a point in the lives of governments when they cross a line that is indistinct yet crucial. The ideals and policy goals that they wanted to promote in power start to matter less to them than the desire to just stay in power, whatever it takes.

The Gillard government is now past that point. Yesterday's budget is not about economics, but politics. It sets out to turn a deficit of $44.4 billion into a surplus of $1.5 billion. At face value, that's equivalent to taking 3 per cent of the Australian economy out of circulation. You don't do that for economic reasons particularly when most of the economy is struggling against the effects of a dollar at record highs and interest rates appropriate to boom times. You do it because, in better times, you once promised it and having lost half a million votes through breaking one promise, you don't want to break another. It's all politics.

The measure that best sums up this budget is its biggest one: the $4.75 billion promised to business over four years as a company tax cut will now be taken away, and given to parents. Why? Employers don't vote for Labor. Parents might.

The government had trumpeted the company tax cut as a way to spread around the wealth created by the resources boom. Now it's gone, and this budget offers nothing else to tackle our biggest economic problem: the slump of growth in jobs and output in most of the economy, above all in the south-east, where most Australians live.

The budget's only initiative for Victoria is to take away the money promised to duplicate the Western Highway beyond Ballarat, and spend it instead on a freight terminal in western Sydney. Perhaps Western Sydney has more Labor seats than the Western District.

At first sight, it's hard to see how this budget makes the numbers fit. It seems to be splashing money around, yet it estimates that spending will actually shrink by $7 billion something that last happened when World War II ended. From 25.1 per cent of GDP, on these figures, spending would plunge to 23.5 per cent in 2012-13, and more or less stay there in future. That's on a par with the cuts of Keating and Walsh in the 1980s, and Howard and Costello in the 1990s.

Yet revenue is forecast to increase from 22.3 per cent of GDP to 23.8 per cent. That would be the steepest tax/revenue rise since the double-digit inflation and bracket creep of the Whitlam years. Put them together and the bottom line would go from a deficit of 3 per cent of GDP to a surplus of 0.1 per cent. The last time we saw anything like that was 60 years ago in the original "horror budget", which was designed specifically to slow down an overheated economy.

Where's the austerity? Mostly tucked away in places where it will cost few votes. The four main savings are to cut defence spending ($5.4 billion over four years), scrap the company tax cut ($4.75 billion), slow the expansion of foreign aid ($2.9 billion) and reduce superannuation tax breaks for the super-rich and over-50s ($2.4 billion).

There are some good moves to raise revenue: phasing out the pointless tax break for mature-aged workers, capping tax breaks for medical expenses, and starting to inject some sense into superannuation tax breaks. But there are other savings to regret, backward steps such as scrapping the standard tax deduction proposed by the Henry review, which is the key to freeing ordinary taxpayers from the complexity of tax returns, as well as scrapping the proposed tax break on interest income. Business and investors do badly in this budget.

But in general, this budget is less austere than the dramatic bottom line suggests. That's largely because, as the Coalition points out, many of the "savings" are fiddles, which shift spending out of 2012-13 into 2011-12. We already had lots of them locked in such as carbon tax compensation delivered in May or June when the carbon tax starts in July and this budget has added two more: the first July payment of the Schoolkids Bonus will come in June, as will the 2012-13 grants to local government. As much as $9 billion of spending has been transferred from 2012-13 to 2011-12 to create this budget surplus.

This is important. First, it means the surplus, if it happens, would be a fake, created simply by shuffling payments. But second, it means the budget cuts are less severe than they seem. If the shift is really from a deficit of $35.5 billion to one of $7.5 billion, and if some of it will be replaced by us saving less to spend more, then the real impact on the economy is more like taking out $20 billion.

But that is still a big hit to a weak economy. It makes the budget forecast of 3.25 per cent growth in 2012-13 implausible. And if the economy stays becalmed, even a fake budget surplus will remain out of reach.

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Swan's song to be in the key of austerity

ON SUNDAY, the Greeks had their say on austerity budgets. In 2009, 78 per cent voted for Pasok (Labor) or New Democracy (Liberals). Now the two are in coalition, and on Sunday, their combined vote fell to 33 per cent. Some swing: 45 per cent.

But austerity there will be: we will find out some of that tonight, some in the days and weeks ahead. And if Labor is not already in enough electoral strife, tonight's budget is a big gamble, with the potential to put it in even deeper strife.

To put it simply, this budget aims to turn a deficit of $40 billion or so this financial year into a surplus of $1 billion or so next year at a time when, other than mining, the economy is going either sideways or down.

The government has been releasing good news before the budget, to make sure it gets noticed. But the bottom line is that in 2012-13, the government will pull more than $40 billion out of Australia's economy, either by spending less, taxing more, or both.

It doesn't have to do that. There is no pressure from markets or voters for Australia to run a budget surplus. Money is flooding in to buy government bonds. And an Essential Research poll found just 12 per cent of us want to get the budget into surplus in 2012-13.

But the government had promised before the 2010 election that the budget would be in surplus in 2012-13. At the time it thought the economy would be growing at 4 per cent by now and adding 250,000 jobs a year.

Sadly, that was another forecast that went wrong. But after Julia Gillard has taken so much flak for breaking her promise on the carbon tax, Labor decided the budget had to go into a surplus in 2012-13, whatever the economic cost.

The outgoing Greek government made a similar choice, under duress from its European partners. Greece has 24 per cent unemployment and an economy that has shrunk 20 per cent in four years. Yet the budget deal imposed by the EU requires Greece in 2013 to run a sizeable "primary" surplus that is, a surplus of revenue over all spending except interest bills.

That will require huge budget cuts. So two-thirds of Greeks voted for parties to the left and right of the big two, in protest. Since the far left and far right can't agree, the centre will probably keep governing but will demand changes to the deal.

So will France, where Socialist Francois Hollande dethroned President Nicolas Sarkozy, after campaigning to replace deficit reduction with growth as Europe's central goal. "Europe is watching us," he said. "Austerity isn't inevitable. My mission now is to give European construction a growth dimension."

It was a similar story even in Germany, Europe's success story. In the northern state of Schleswig-Holstein, Chancellor Angela Merkel's coalition was swept from power in a swing of 7.5 per cent: the third state it has lost in a year or so.

In Europe, austerity is going out. In Australia, it's coming in.

Don't worry, the Treasurer tells us: the budget forecasts that even with $40 billion taken out of the economy, we'll still grow by 3.25 per cent. Yes, but the last accurate budget forecast was in 2007. And the last time he forecast growth of 3.25 per cent, we got just 2 per cent. If that happens this time, it will mean boom in outback mines offset by recession in the south-east. That is the risk tonight.

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Prepare. Swan's budget nightmare.

IN THIS year of uncertainty, my favourite quote is from fund manager Matt Williams, head of equities with Perpetual Investments. Asked how the global economy would go in 2012, he demurred: ''There are too many moving parts to forecast it all with accuracy.''

On the eve of next week's federal budget, Treasurer Wayne Swan will nod his head. Two years ago, when he pledged to deliver a budget surplus in 2012-13, Treasury's growth forecasts made it seem easy and appropriate.

But those forecasts proved wrong: too many moving parts didn't move as forecast. Now Swan has to deliver a surplus that will be both difficult and inappropriate.

Reserve Bank governor Glenn Stevens, too, might nod his head. The Reserve also got it wrong during 2010 and 2011 by misreading the speed of the economy's various moving parts. Now the RBA is undoing the interest rate rises it so confidently inflicted on us - and waiting to see how much of the intended stimulus gets past the banks to small businesses and households.

Ted Baillieu and Kim Wells might well nod their heads. In short time, Victoria has gone from economic standout to being close to recession. This week's state budget was sound, but not stimulatory. It assumes that Victoria's economy will trough in 2012, then recover during 2013. But for that, those moving parts will have to click together.

And the moving parts that matter most to us might be on the other side of the world.

Tomorrow, there will be two elections in Europe that could make it switch priorities from deficit reduction to growth. At best, this could revive the global economy; at worst it could unleash a new wave of instability that would jeopardise what the International Monetary Fund calls its ''fragile recovery'', and even send the world into a double-dip recession.

One is the French presidential election. If the polls are right, President Nicolas Sarkozy will be defeated by socialist challenger Francois Hollande. If so, that would mean that since the market rout of September-October 2008, 19 of the 27 European Union leaders then in power have been tossed out, along with their counterparts in Japan, Australia, New Zealand, Israel, etc. In that time, only five EU leaders have won re-election.

Sarkozy has been a disappointment to those who hoped he would reinvigorate France, but Hollande's policies are seriously retro. They include undoing Sarkozy's reforms (Hollande wants to lower the pension age from 62 to 60), lifting France's already high minimum wage, lifting state spending (already 56 per cent of GDP, compared with 36 per cent here), putting a 75 per cent tax on incomes over ?1 million ($A1.28 million) - and demanding a renegotiation of the EU fiscal pact to shift priority from reducing deficits to boosting growth.

In Paris, the markets believe that as president, Hollande would quietly shelve some of those policies to focus on renegotiating the European pact. Sarkozy has been the junior partner of German Chancellor Angela Merkel in steering Europe down the path of austerity. The electoral tide is now swinging Europe the other way. In the short term we will see more crises, more negotiations, more summits, and more instability in global markets.

What could be even more important, however, is the result of tomorrow's Greek election. After years of bitter polemic and two changes of government, the traditional rivals PASOK (left) and New Democracy (right) briefly united last year to negotiate Greece's austerity pact with the EU and the International Monetary Fund. That will require even more tough measures to force the Greek budget back into surplus, at a time when the country is in a deep depression.

Greece's GDP fell by 7.5 per cent over 2011, and by 17 per cent since the crisis began. Unemployment has climbed past 21 per cent; among young Greeks, it is 51 per cent. Not surprisingly, Greeks are rebelling; the polls show that new or previously obscure parties opposing the deal could win most seats in the new Parliament. There is no obvious way out; an unravelling of the Greek agreement risks unleashing a market panic like that of 2008.

This is a year of uncertainty. Australia was well-insulated from the 2008 crisis because its banks had lent wisely, the Rudd government moved boldly to shore up household finances and bank liquidity, and China's demand drove coal and iron ore prices sky-high. We remain relatively well-insulated now.

Despite the Coalition's rhetoric, Australia's government debt is very low. Even gross debt is just 24 per cent of GDP, the third lowest in the affluent world. Foreign investors see Australia as a haven, snapping up a net $110 billion of government bonds in the past two years, and driving bond yields to record lows. Almost 80 per cent of Australian government bonds are now held overseas. Yes, that makes us vulnerable to changes in global sentiment. But look around: whatever we do, Australia is not a country the world is likely to worry about.

Our problems are different from Europe's. The one fact that sums them up is that in 2011, in real dollars, mining investment increased by more than GDP. Mining investment is booming, but the rest of the economy is sluggish. The high dollar has flattened much of it. High interest rates and consumer caution have flattened other parts. And the trickle-down from the mining sector is too much of a trickle to kick-start activity.

The dollar is the biggest problem. It raises the cost of doing anything in Australia rather than in the rest of the world. A KPMG study in March found Australia is now the second most expensive business location in the world, behind only Japan. That happens when your currency rises 50 per cent above its long-term level, as Australia's has since 2005. If you're buying anything overseas - holidays, goods on the internet, machinery - it's a blessing. If you're trying to do anything here that competes with anything done overseas, it's a disaster. And the dollar will remain high as long as the world sees us as a haven.

Even BHP and Rio Tinto are now considering shelving big mining projects here, in part because the high dollar has inflated their cost in global comparison. Mineral processing has boomed, but the output of the rest of Australian manufacturing has slumped 7.5 per cent since the GFC, costing more than 100,000 jobs. Those who tell you manufacturing is doing well are seriously uninformed.

The growth pace of the economy in the second half of 2011 was just 2.5 per cent. There are signs that the slowdown might have bottomed. We are told that next week's budget will forecast growth to accelerate to 3.25 per cent in 2012-13. Indeed, Swan is talking as if the mere forecast is already an achieved fact. Not so - and the risk that it will not be achieved could become his nightmare over the year ahead.

Why? Because the budget usually forecasts growth to be 3.25 per cent or thereabouts. That doesn't mean that's what we get. Two years ago, the budget forecast growth of 3.25 per cent, but we ended up with just 2 per cent.

The budget forecasts were good in the good years, but in the past four years, they have been way out. In 2008-09, 2010-11 and 2011-12 they forecast far more growth than we got, while in 2009-10 they did the reverse. Too many moving parts!

There's a big risk that this forecast will again prove too optimistic. Mining investment could fall well short of the $120 billion forecast. The budget itself will slow activity: even with all the fiddles, you can't take $40 billion out of this economy without it putting a brake on growth, particularly where it is already weak. With the world recovery fragile, state governments also cutting spending, business and consumer confidence subdued, and the banks passing on only about half the Reserve Bank's rate cuts, it's difficult to see where that growth will come from.

If growth falls short, then the budget too will fall short of its target. Swan could be forced to play catch-up, tightening spending again and again in a low-growth economy to ensure that his political target of a budget surplus is met. Those moving parts are unpredictable.

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Budget 2012-13: Why Baillieu had to cut.

THE Baillieu government's budget has got us talking. Is the government really so hard up that it has to break its promise not to sack public servants?

Is it taking us back to the Kennett era? Or is it, as Kim Wells claims, actually Labor's fault? Let's check some of that against the facts.

1. Does the government's pledge to cut 4200 jobs take us back to the Kennett era?

Not if you remember the Kennett era. By this stage of its life, the Kennett government had sacked 45,000 public servants, teachers, nurses and police. By its end, 81,000 state and local government jobs had gone: one in four!

The Baillieu government plans to cut its workforce by 4200 over two years. Treasurer Kim Wells hopes to do so by voluntary redundancies, targeting back-office jobs where there is duplication between departments and agencies, or between federal and state programs. People will be sacked only if those numbers fall short.

The state public service now has 37,000 people, up from 23,000 in 1999. Even if all 4200 job cuts come in that core, it would still have 33,000 left. It's not even Kennett Lite.

2. But do we really need it? Has state revenue collapsed?

Sure has. When the government took office, Treasury estimated that Victoria in 2012-13 would have revenues of $49.7 billion to spend. Within 18 months, on unchanged policies, that had shrunk by almost $2 billion, to $47.75 billion.

The government's revenue hikes on WorkCover, water authorities, vehicle rego, car taxes, stamp duties, tax compliance and fines have added $600 million to lift that to $48.35 billion. But it still leaves a gap of $1.35 billion that would have sent the budget into deficit, were it not for spending cuts.

Most of the revenue collapse has come from the GST. The retail slump and the Grants Commission's decision to cut our share of GST money has cost Victoria $1 in every $8 it had expected from its biggest tax. The slump in house prices and sales has created an equally sharp fall in its stamp duty. And the state has few tax options.

So it had to cut spending. It says it's lopped off $1.15 billion in savings. But in net terms, spending will be down just $650 million, or 1.3 per cent, from the forecast Treasury issued in 2010. That's frugal housekeeping, not liposuction surgery.

3. Why do we need a surplus, anyway?

Victoria's budget surplus is not like the Commonwealth surplus. It just means that revenue pays for recurrent spending the cost of running schools, hospitals, public transport, police, and so on, and a bit over.

The bit over is then spent on infrastructure. In 2012-13 the state plans to invest a record $5.8 billion in infrastructure, roughly half from its own funds and half from borrowing. The surplus is not being banked, but invested.

Second, Victoria has own-source revenues of $26 billion, a fraction of the Commonwealth's $375 billion. It has far less ability to rebound from deficits to sustain a balance over the cycle. The target to run surpluses of $100 million is a modest one.

4. Was it all the Labor government's fault, as Wells claims? Did Steve Bracks and John Brumby put Victoria on an unsustainable fiscal course?

No, that claim is phoney. The "unsustainable course" it refers to is the sudden spike in spending during the GFC, when the federal government paid the states to build school halls and the rest.

But that was never going to be sustained. When Brumby lost office, state spending was growing at only 2 per cent.

The truth is that B&B had a splurge in their first budget in 2000-01, then settled down to steady, AAA-rated fiscal responsibility.

Between 2001 and 2008, revenue grew on average by 6.7 per cent a year, and spending by 6.8 per cent. Big deal!

What is unsustainable is raiding the funds of state agencies, as Baillieu and Wells did to produce this surplus. Pots should not call kettles black.

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Victoria: Good housekeepers dust the corners

THIS is a low-key budget from a low-key government. It has few highlights and few lowlights. It will not lead ratings agencies to question Victoria's AAA credit rating, nor to demonstrators outside Parliament House.

It is not really leading Victoria anywhere. It is just good housekeeping: coping with hard times by a nip here, a tuck there, maybe lots of nips and tucks and endless restraint, resisting the temptation to buy new things, so that the state ends up saving a little rather than spending more than it earns.

This time, frugality was not enough to keep the budget in the black. So Ted Baillieu and Kim Wells pulled out a few more tricks to get it over the line. They took $300 million over four years off funding for TAFE courses they see as low priority. They pinched another $420 million from the water authorities.

As a last resort, they scrapped the state's well-targeted first home buyers bonus. That saved just enough $165 million a year to create a respectable surplus in 2012-13, and something more thereafter.

Ratings agencies Moody's and Standard & Poor's gave it a tick of approval. Many Victorians will do the same. It opened no big issues for Labor to attack.

But nor was there anything resembling a jobs plan, or anything aiming to get the economy to fire on all cylinders again.

And there was nothing to answer the question Victorians are asking: why does Ted Baillieu want to be Premier? Where does he want to take us?

At some point, his government is going to have to tell us what it stands for. The budget was a missed chance to do that.

There are good things here. The $311 million of initiatives to protect vulnerable children is welcome. The $2.7 billion of new infrastructure projects will relieve a battered construction industry. Some will welcome the $670 million to build new prisons; others will ask why the state would rather fund prisons than TAFE courses.

The odd thing about this budget is that it is so normal, given that the times we are going through are anything but.

Victoria's economy is struggling under the double burden of the high dollar and high interest rates. Unemployment has climbed to 5.5 per cent. Spending by foreign students fell $1 billion last year.

Home building, retail sales, house prices, manufacturing output, they're all down. And business confidence has sunk with them.

Yesterday's welcome interest rate cut will help, but the budget won't. Since December's budget update, the state has cut $1 billion from this year's infrastructure spending. It plans a rebound to record levels in 2012-13, but over the forward estimates, state infrastructure spending is forecast to decline from 2 per cent of gross state product (GSP) in 2010-11 to just 1 per cent by 2015-16. That's only a projection, of course. And it will have to rise if the three big projects on the budget's planning list the Melbourne Metro rail project, the East West road link, and the container port at Hastings are built any time soon.

The infrastructure needs are endless. This budget commits to remove three of the 175 level crossings that shut roads down. Wells says that on average, Springvale Road is closed for 50 minutes of the two hours of peak traffic, and Mitcham Road for 54 minutes. Who can seriously argue against spending the money needed to fix problems like that?

It's by cutting infrastructure spending that the Baillieu government plans to start reducing the budget sector's net debt by 2015-16, after it peaks at $24 billion, just 6 per cent of GSP. The debate we need is whether we want the infrastructure we desire, or a AAA rating. We can't have both.

In the budget papers, Treasury argues that Victoria's economic state is challenging, but not critical. It says that employment is flat, but not falling, as the statistics report. It believes Victoria is heading for growth of just 1.5 per cent in 2011-12 and 1.75 per cent in 2012-13, not a recession. And it forecasts a recovery to begin early next year, and a positive long-term future based on exports to rapidly growing Asia.

You hope it's right.

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Memo Australians: The IMF dos not agree with you

THE International Monetary Fund has set Australia a challenge. If it is right, in 2012 we will experience the third-fastest economic growth of the 34 rich countries.

This will be at the same time as a fiscal tightening 2? times more severe than in Europe, and a sharp fall in our export prices. If we achieve that, it will be heroic, not to say improbable.

Essentially, the IMF has backed Treasury's forecasts - Australia has a history of getting upset if it doesn't - but the absence of any commentary on Australia in the 400 pages of reports released this week is hardly a ringing endorsement.

It predicts that Australia will grow by 3 per cent this year, and 3.5 per cent next year and thereafter. Inflation will stay within the Reserve Bank's target band.

Prices for coal and iron ore, our two biggest exports, will plunge 25 per cent over 2012 and 2013, sending our current account deficit back up again.

The IMF does not say Australia "will outperform every other major advanced economy in the world", as Julia Gillard and Wayne Swan wrongly claimed yesterday.

The IMF does not endorse Australia's bipartisan policy of pushing the budget into surplus in 2012-13, regardless of the effect of growth.

It implies the opposite: its board of directors and its chief economist, Olivier Blanchard, urge low-debt countries (such as Australia) to "reconsider the pace of consolidation" and rely on "automatic stabilisers" growth-lifting revenues and cutting welfare bills to "reduce deficits over time".

Two key points. The IMF's forecasts are just forecasts. Two years ago, it forecast Australia to grow 3.5 per cent in 2011. A year ago, it cut that to 3 per cent.

The real outcome, as Tony Abbott notes, was growth of just 2 per cent. Its forecasts rarely differ significantly from Treasury's: it doesn't work that way.

What matters in the IMF's World Economic Outlook is not what it says about Australia but what it says about the world. And that is very true this time.

For the world economy, it is hopeful, but not confident. It forecasts growth to be a subdued 3.5 per cent this year, rising to 4 per cent in 2013. But Blanchard depicts the global scene as "uneasy calm: one has the feeling that at any moment things could get very bad again".

The IMF sees three main risks. The biggest is Europe's fragile repair job last December. While the progress is encouraging, it says, the problems remain unsolved, and excessive fiscal tightening risks another collapse, potentially breaking the eurozone apart. If that happens, it warns, the financial cataclysm could make 2008 look good.

Second, an attack on Iran might blow global oil prices sky-high, taking the "fragile" recovery with them.

And third, to fix their balance sheets, Europe's stressed banks might impose a credit crunch that would send a shockwave around the world even here.

Blanchard says the top priority is "to durably increase growth and decrease unemployment" in advanced economies.

"We think that wherever it is possible, automatic stabilisers should be left to play," he said. "This is a remark about Spain, and other countries as well."

Are you listening, Treasurer? Prime Minister? Opposition Leader?

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A budget surplus Swan won't wear

THE OECD has told Wayne Swan how to get his budget back into surplus. Indeed, it has told him how he could run a $100 billion surplus if he wants one. But there's a catch most of its suggestions would be political dynamite.

They include scrapping tax breaks for superannuation and for owner-occupied housing. An emissions trading scheme with a target of a 20 per cent cut from 1990 levels and no compensation. A GST imposed on food, healthcare and financial services.

But in a new report to its 35 member countries, Fiscal Consolidation: how much, how fast, and by what means?, the IMF does not call on Mr Swan to do any of this in 2012-13. It says fiscal tightening must take account of economic growth in "a consolidation strategy that could be implemented flexibly, capable of adjusting the speed and intensity as new information becomes available".

International Monetary Fund chief Christine Lagarde gave the same advice overnight in a speech in Washington, urging countries that "have the flexibility to reconsider the pace of deficit reduction this year, to limit the harm to growth.

"We need more confidence and demand," Ms Lagarde said. "The immediate focus of policies must therefore be to support growth where it is still weak.

"Let me be clear: in many countries, especially in the advanced economies, fiscal adjustment is essential. But the pace of adjustment matters."

The OECD report finds Australia has the lowest government debt of any of the 28 rich countries studied. Gross debt is a bit over 20 per cent of GDP here, compared with almost 100 per cent in the United States and more than 200 per cent in Japan.

The main thrust of the OECD report is to warn countries to adopt medium to long-term plans to get their debt back below 50 per cent of GDP, to give them the flexibility to handle crises at the same time as dealing with the costs of ageing populations.

Even Australia, it warns, will need to tighten its budget to cope with the healthcare, aged care and pension costs as its population ages. An IMF report earlier this week reported that the life expectancy of 60-year-olds in Australia is increasing at the rate of nine years every half-century.

The IMF suggests six reforms it estimates could improve federal and state budget bottom lines by 8.9 per cent of GDP, or roughly $138 billion a year. But few appear politically feasible. They include:

Cut the greenhouse gas emissions target to 20 per cent below 1990 levels, driving up emissions permit prices, with no compensation (saving: $65 billion a year).

Scrap tax breaks for superannuation and owner-occupied housing ($42 billion).

Extend the GST to food, healthcare and financial services ($9 billion).

Tighten eligibility for family benefits ($8 billion), and find savings in healthcare ($8 billion) and schools ($6 billion).

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The least-damaging way of achieving a surplus

DAVID Stockman had a problem. A gung-ho young Republican congressman and fiscal hawk, he had been recruited by the new president, Ronald Reagan, to be his budget director. But while he thought their goal was to cut taxes and spending and put the budget back in surplus, he discovered his boss had other ideas.

Reagan wanted to slash marginal tax rates, especially on wealthy Americans, believing this would launch a ''supply side'' avalanche of growth. But he wasn't keen on spending cuts, and nor was Congress. And to get inflation under control, Federal Reserve chief Paul Volcker had hiked interest rates to levels that would soon drive the country into recession. The budget deficit was set to explode - on Reagan's watch.

Stockman plugged the gap by employing two old friends: Rosy Scenario and the Magic Asterisk. He forecast 5 per cent growth (Rosy Scenario); that made the budget numbers look much better. And he claimed billions of dollars of savings from spending cuts to be specified later (the Magic Asterisk).

Of course, neither was real. In 1982, the US economy instead went backwards by 2 per cent. The unspecified spending cuts were never implemented. Within two years, the US budget deficit had almost trebled.

Wayne Swan must have been studying Stockman's memoir of those years, The Triumph of Politics. Swan has already introduced a mild form of the Magic Asterisk, cutting $800 million from departmental budgets next year as an ''efficiency dividend'', to be delivered by cuts to be specified later. And now he is being seen with Rosy Scenario, telling us Treasury will forecast ''growth around trend'' in 2012-13, even after the government has pulled $40 billion of budget cuts out of a weakening economy.

Trend growth used to be seen as 3.25 to 3.5 per cent a year. But it's been shrinking for a while - 3 per cent is the average over the past decade - and given that spending until the GFC was inflated by a build-up of debt, which won't be repeated, and that population and productivity growth have both fallen, 3 per cent is probably the best benchmark for the future.

The budget cuts, at face value, would take 2.6 per cent of GDP out of the economy. But you may be surprised to know that the federal government transfers more money for others (households and states) to spend than it spends itself. When those transfers are cut, or when our taxes rise, we will replace part of that by saving less and spending more ourselves. So the net impact of the cuts will be less than 2.6 per cent of GDP.

Suppose the net effect of getting the budget into surplus is to cut GDP by 1.5 per cent. For growth to still end up at 3 per cent, that implies that growth without the budget cuts would have been 4.5 per cent. That is double our present growth rate. How on earth could we get there from here?

Well, we could try to reduce the three headwinds that have reduced the non-mining economy to a standstill: the excessively high dollar, excessively high interest rates and excessively large federal and state budget cuts. In particular, we could make the budget surplus a medium-term target, instead of one to be achieved in 2012-13, however weak the economy.

Obviously, budget surpluses are good things. But the central question is: given the weak state of the non-mining economy, would Labor be budgeting for a budget surplus now if it hadn't already promised one? The answer, clearly, is no.

The most responsible course is for the government to back down. A budget surplus in 2012-13 is less important than avoiding a recession in most of Australia.

But if the government remains bent on making the budget papers its 5000-page suicide note, what is the least damaging way it could meet its target? Three goals, perhaps four, stand out:

. The main problem for the economy is the dollar, which has been pushed 50 per cent above its 1985-2005 average by high mineral prices, high interest rates and global fears about Europe. Lowering it should be the prime goal of policy.

The budget's influence is limited, but its diesel fuel tax rebate is a very large tax subsidy on the use of fuel by the mining industry. It is inconsistent with Australia's stated opposition to fuel subsidies. And Treasury arguments that we should not tax business inputs are inconsistent with the taxes it levies on workers and imported equipment, which are also business inputs.

. The budget cuts will hit mostly in the south-eastern states, where 70 per cent of Australians live and economic activity is at a standstill. Reviving activity in the south-east must be a priority. Swan has already pulled two years' funding for infrastructure projects into 2011-12, and has budgeted nothing for them in 2012-13. He should instead step up investment in projects in the south-east, such as Melbourne's regional rail link and the Western Ring Road upgrade.

. A Labor government ought to have it in its DNA to protect the most vulnerable Australians. Sadly, this one doesn't. It has allowed the unemployment benefit to sink well below the poverty line; and that is heartless, when most people on benefits are unemployed for more than a year. It should bite the bullet and spend the $600 million that welfare groups say it will cost to lift the dole for single people by $50 a week. It will all be spent, and that will stimulate activity. To pay for it, cut tax breaks and create a more level playing field.

. Last, the more phoney spending cuts the government makes, the better. Opposition finance spokesman Andrew Robb has shown that eight budget fiddles have already moved $6.2 billion of spending out of 2012-13. Well, the more of them, the better. At least they do no harm to the economy; real spending cuts will hurt.

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Memo Treasurer: We're not the toast of the G20

Treasurer Wayne Swan is out thumping his chest about Europe. First, he warns us that if we don't have a budget surplus in 2012-13, we could end up like Europe. Second, he tells us that Australia is a standout in the world economy, the envy of the world.

On Sunday, the Treas ascribed Spain's 23.6 per cent unemployment rate to lax fiscal discipline before the global financial crisis. Then yesterday, he confided that at the coming G20 meeting in Washington, ''there's not too many finance ministers ? who wouldn't trade places with Australia in a heartbeat''.

We keep hearing this, but is it true? Was Spain's collapse due to lax fiscal policy? Is Australia the country everyone else wants to be?

Take fiscal policy first. This is Swan last Sunday in his weekly economic note: ''If the events in Europe over the past 18 months teach us anything, it's the importance of budget discipline. Many governments ignored the necessary economic reforms over a long period, allowing their spending to blow out and their budgets to become unsustainable. We see the consequences of this today in the region's sovereign debt crisis.

''The failure to maintain fiscal discipline has undermined confidence and economic growth across Europe. This has led to lengthening jobless queues and unemployment rates that are two, three and even four times our own. In Spain, for instance, the jobless rate is nearly 23 per cent. Australia's continued strict budget discipline is our best defence against this uncertain global outlook.''

But hang on, Treas: did no one tell you that before the global financial crisis Spain was running even bigger budget surpluses than Peter Costello: 2 per cent of GDP in 2006, 1.9 per cent in 2007? Or that from 1996, Spanish governments of both sides more than halved its net debt: GDP ratio, from 60 per cent of GDP to 26.5 per cent?

Spain's crash was not due to a lack of budget discipline. It was brought on mostly by the collapse of a huge real estate boom, which has now turned into a savage bust.

That combined with all the factors that have sent Europe into recession: the big losses of European banks lending into US sub-prime housing and other risky markets; the contagion effects from Greece; and the vicious circle of falling asset prices, falling spending, falling employment and falling incomes and revenue, which is now becoming a vortex dragging it down towards a long depression.

Housing prices have slumped 22 per cent from their peak and are forecast to fall by 12 to 14 per cent more this year. Standard & Poor's forecasts that by Christmas, 25 per cent of Spanish home owners will have negative equity, owing more than their property is worth.

What's the lesson? Avoid booms. They tend to bust in damaging ways. But in Australia, officials are cheering on a mining investment boom, which one day will also bust, spreading its fallout all over our economy.

Spain's new conservative government plans to emulate Swan. On Tuesday it presented a budget that aims to cut the deficit next year from 8.5 per cent of GDP to 5.3 per cent.

Bloomberg reports that ministries' spending will be reduced by 17 per cent on average, with the foreign ministry cut by 54 per cent. Income tax and property tax rates have been hiked. But we saw in the 1930s that fiscal austerity in these conditions simply deepens the downturn.

Yes, there was fiscal indiscipline in Europe before the global financial crisis, but mostly by neglect. Greece was a Third World example of fraud, recklessness and incompetence, but it was unique.

IMF data shows that in 2007, of governments in 18 rich European countries, five (all in Scandinavia) were net lenders. Four, including Spain and Ireland, had brought their debt:GDP ratio to relatively low levels, between 10 and 26 per cent. (Ireland, too, was the victim of a property boom going bust.)

Eight others, ranging from Britain (38 per cent) to Italy (87 per cent), were guilty of fiscal complacency. Some stayed in deficit throughout the good years. Germany and France repeatedly breached the EU's Maastricht budgetary rules, which they themselves had written. Portugal, another crisis state, was among the offenders. And lastly, Greece was in a class of its own.

And how does Australia compare? The IMF figures show that, far from being a world leader in fiscal discipline, in 2007 our surplus ranked only 16th of the 34 rich countries as a share of GDP. Last year, we ranked 18th. That's no standout effort.

On the economic front, we are doing better than most European countries, worse than most Asian ones. Last year, our growth rate of 2.1 per cent put us just equal 13th of the 34 rich countries.

Around the G20 table, Swan will find that 13 of his 19 counterparts can boast higher growth than him. They include South Korea (3.6), Germany (3.0) and Canada (2.5), as well as all 10 developing countries.

Australia ranks better on unemployment, but even there, our 5.2 per cent rate is just the ninth best of the 34 rich countries.

Surely we lead in something? Yes: the OECD estimates our growth in unit labour costs last year was the highest in the Western world, at 5.9 per cent.

Maybe the Treasurer can wear that gold medal in Washington.

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Budget cuts will bring on recession

The government has revealed that with growth at just 2.5 per cent, it will reject calls for tough budget cuts, raise spending in areas that need stimulus, and extend its deadline to put the budget back in surplus to 2015-16. You didn't hear that?

LAST week was budget week. The government revealed that with growth at just 2.5 per cent, it will reject calls for tough budget cuts, raise spending in areas that need stimulus, and extend its deadline to put the budget back in surplus to 2015-16.

You didn't hear that? Perhaps that's because that budget was in Canada: the country and economy most like Australia, but at the other end of the world. Facing similar problems, it has come up with a very different solution.

Canada is run by conservatives. Prime Minister Stephen Harper's government is the closest thing the world has to the Howard government. Finance Minister Jim Flaherty is a tough, no-nonsense social conservative who earned his fiscal spurs by shutting down the tax break for trusts. In his budget speech, along with familiar rhetoric - ''Canada has outperformed most other industrial countries … Our net debt to GDP remains the lowest in G7, by far'' - he anticipated the criticisms from the right for not cutting more from spending:

''We remain concerned about the number of Canadians out of work … Because of our government's responsible choices, we can eliminate the deficit through commonsense, moderate restraint. We have no need to resort to drastic cuts … We have no need to undertake radical austerity measures … The savings we have identified are moderate, less than 2 per cent of federal program spending.''

I suspect John Howard, were he still in power here, would do the same. And I suspect Tony Abbott, were he in power, would do much the same - whatever he says from opposition.

Take New Zealand: the other country most like Australia, except that its mines are forests and sheep farms. On Sunday NZ Prime Minister John Key declared he will stick to his timetable to get the budget back in surplus in 2014-15. Key, too, is from the conservative side.

Canada and New Zealand do not lack shock jocks and right-wing ideologues demanding a budget surplus ASAP. Rather, as economist Saul Eslake of Merrill Lynch Australia puts it, Labor's leaders are afraid of being seen as being another fiscally irresponsible Labor government:

''Labor craves the approval of the financial markets in a way the Liberals don't need to,'' Eslake says. ''Labor has to show that it can govern responsibly. The Liberals don't.''

It is the only plausible explanation for the tragedy we are about to experience. Next month Julia Gillard and Wayne Swan will give us a budget that will probably send most of Australia into recession.

In one year, we will go from a deficit of 2.5 per cent of GDP or more, to a surplus. By a mix of revenue rises and spending cuts, Labor will pull 2.6 per cent of GDP out of the economy. That is 2½ times the fiscal contraction imposed by the Hawke government in 1986-87, or the Howard government in 1996-97. It is the stuff recessions are made of.

Why do it? Because Labor has pinned its credibility to its pledge to deliver a budget surplus in 2012-13. The promise it made in 2009 has become a mantra, repeated 1000 times over, and to be delivered regardless of economic conditions.

In 2009, Treasury had assumed that by now the economy would be booming, and the government would pass the baton to the private sector to take Australia on. It projected economic growth in 2011-12 and 2012-13 of 4.5 per cent, each year. It projected almost 600,000 new jobs. Would the private sector be ready to take the baton? You bet.

Now 2012-13 is almost here. Growth is just 2.5 per cent, with most of that in outback mines. In south-eastern Australia, except mining areas, activity is weak. Much of the country is close to recession. Job growth has stopped. Retailing is flat, manufacturing is weak, housing in free fall. The high dollar is slowly strangling trade-exposed sectors; high interest rates are cramping the rest.

Is the private sector ready to take the baton? Into these headwinds? No way.

But it won't be that bad, we're told. Treasury points to an IMF study last year of 173 serious ''fiscal policy changes'' in Western countries in the past 35 years. The study, Expansionary Austerity: New International Evidence, found that, on average, budget savings equivalent to 1 per cent of GDP will lower GDP itself by 0.62 per cent after two years. The penalty rises with bigger savings, but more slowly, with each percentage point of extra budget savings cutting GDP by 0.5 per cent.

Assume that our budget savings will be 2.6 per cent of GDP. On the IMF average, that would cut 1.4 percentage points from GDP growth by mid-2014. If you assume that we would otherwise grow at our trend rate of 3 per cent a year, that would still give us growth of 2.3 per cent.

But no: the detail of the IMF study suggests Australia's budget cuts will intensify the divide between mining and the rest. It implies that over two years, domestic demand would shrink by 2.75 per cent. There would be gains in net exports, but the regions and sectors hurting now would hurt much more. And the IMF found the damage was twice as big when the country is seen as low risk - as Australia is. This implies that over two years, we face a loss of almost 3 per cent of GDP, and 5 to 6 per cent of domestic demand.

The study cited to play down the risks of Swan's strategy in fact shows how high they are for the non-mining states and sectors. Which is more important: keeping a promise or keeping us out of recession?



WAYNE SWAN April 4, 2012

MUCH has been said in recent days about why the government is returning the budget to surplus in 2012-13.

That's only natural and indeed it's very important we have a strong debate about our economy.

Recent opinion pieces by The Age's economics editor, Tim Colebatch, have claimed returning the budget to surplus would put the economy at risk.

Mr Colebatch is a highly respected observer of the economy and I always read his opinions with great interest, however, on this occasion he ignores some crucial facts, which help explain why delivering a surplus is such a vital economic imperative.

But first, some context. In the face of the worst global meltdown in about 80 years, the government stepped in to support demand, protect jobs and keep the doors of business open. This ensured our economy did not go into recession, virtually the only developed economy not to.

Our response to the crisis underpinned growth in our economy, which is now more than 7 per cent larger than it was pre-GFC. Not only have some advanced economies not even returned to their pre-crisis output level but some are again going backwards after contracting in the December quarter.

With solid growth, healthy public finances, low inflation and low unemployment, we are already the envy of many other advanced economies.

In a couple of weeks I'll be attending my 20th G20 meeting and I can confidently say there's not too many finance ministers around that table who wouldn't trade places with Australia in a heartbeat. Just as it was right to step in and support demand when it was needed, it is right to step back and provide space for the private sector to grow and that is what we have been doing.

Indeed, it's exactly because our economy is moving back towards trend growth that returning to surplus is the responsible course for fiscal policy.

Crucially and this is what Mr Colebatch overlooks the Treasury forecasts for growth in the next financial year already take into account that the budget will return to surplus.

Obviously, our consolidation has a dampening impact on growth but this is offset by the strengthening growth in the private sector.

In other words, the Treasury's forecasts of growth around trend are based on our announced policy setting including our commitment to return the budget to surplus.

The most constructive contribution fiscal policy can make to a patchwork economy with uneven growth across sectors is to move the budget back to surplus. When setting interest rates, the Reserve Bank takes into account all the economic influences on monetary policy, including the stance of fiscal policy.

Moving the budget back to surplus in 2012-13 also ensures we're not adding to price pressures in the economy, providing monetary policy with maximum possible flexibility to respond to economic developments.

It is Australia's best defence in these times of global economic uncertainty. When asked about the government's plan to return the budget to surplus in 2012-13, the deputy director of the IMF's research department, Jorg Decressin, said: "Where you have these strong investment plans in the pipeline, where the growth prospects are still quite good, this strikes me as appropriate."

We are now one of only eight countries to be awarded the coveted AAA status with a stable outlook by all three major credit rating agencies.

This is the first time in Australia's history this has been achieved and has been repeatedly described as partly a result of our strict fiscal policy.

It didn't happen under Howard and Costello, despite what the Liberals would like you to believe. Returning the budget to surplus also allows us to make the investments our country and our community need for the future.

In more general terms, any government must decide its policy setting on the basis of its best assessment of the state of the economy and our economic prospects.

Yes, we face challenges such as those flowing from a high dollar, but with probably the strongest economy in the developed world, I'll stand by our record and our assessments of the economy so far.

I'm an optimist about our country and I firmly believe it's a very bright outlook as we stand at the start of this Asian century, as long as we're up to the task of continuing our record of responsible economic management and embracing the vast opportunities that lie before us.

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Swan's foolish surplus fetish

WAYNE Swan's determination to deliver a budget surplus, regardless of the state of the economy, is seriously reckless. Labor has chosen to risk sending most of Australia into recession in order to keep a promise it should never have made.

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.

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Company tax is weak because company profits are weak

IF AUSTRALIA never had a recession in 2008-09, and is the economic envy of the Western world, as we are told, then why is it so hard for the federal government to get its budget back in surplus?

Wayne Swan says it's because tax receipts are so weak. Tony Abbott says it's because Labor is addicted to spending. Who is right? It depends which figures you compare. If you take the figures for 2007-08 and 2011-12, then both are right.

The midyear forecasts project spending in 2011-12 to be 24.8 per cent of GDP, up from 23.1 per cent four years earlier.

The forecasts expected to slash that to 23.6 per cent in 2012-13, which now looks understated, and would still be above the level Labor inherited.

But is that surprising? After all, unemployment has grown, and the carbon tax and mining tax revenues are all earmarked for new spending. The bills for healthcare, pensions, aged care, all keep rising.

Swan wants us to focus on the fall in revenue. In the midyear update, cash revenue was projected to be 22.6 per cent of GDP in 2011-12, down from 25.1 per cent in the last Costello budget. That's a big fall, about $37.5 billion a year. Even in 2012-13, the government's take was projected to be 23.9 per cent of GDP, which Swan now says will be revised down.

Swan spent a lot of time yesterday explaining how the company tax take had fallen in the mining boom, because mining companies were investing so much depreciation knocked off half their tax bills. Capital gains tax plunged because the GFC left investors and firms with capital losses to write off.

All that is true. But the main reason company tax revenue is weak is that company profits are weak.The real problem is that since 2007 the economy has grown just 2 per cent a year. And it's hard to get back to surplus in a weak economy.

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It's Baillieu's responsibility, not his fault

THE downturn in the Victorian economy was always going to hit the Baillieu government's finances. The surprising thing is that the damage is not worse.

The slump is certainly dramatic: an $823 million turnaround year on year, from a surplus of $482 million to a deficit of $341 million. But most of the fall was in only two areas.

The slump in house prices and clearance rates cut stamp duty on conveyancing by $360 million or 17.5 per cent year on year. And Treasurer Kim Wells says the Commonwealth has held back $230 million of funding for the regional rail link and the new cancer centre in Parkville.

Payroll tax collections remain buoyant, rising 8 per cent year on year, and raising doubts as to whether private-sector jobs are really falling as fast as job figures suggest. And Treasury remains confident that the budget will end up in the black, sticking to its estimate of a $148 million surplus by June.

We hope it's right. But Treasury concedes that employment and consumer demand have both "softened". Sift through all the recent data on the Victorian economy, and the conclusion is unavoidable: the state is either in recession or close to it.

That's not the Baillieu government's fault: it's the the fault of the high dollar, high interest rates, and the public sector passing the baton when the private sector is not in a position to run with it. But the government and its advisers are being strangely defensive about a problem they didn't create.

Why is Ted Baillieu quoting economic growth figures from 2010-11? The view looking back may be fine, but Ted, the issue is where we are now, and where we're heading.

The government should get on the front foot, admit the problem, and change policies to tackle it. Former Premier's Department head Elizabeth Proust suggests it bring forward infrastructure investment as a stimulus. That's good advice.

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Victoria slumpig. So it's budget cuts

VICTORIA is facing further deep spending cuts after Premier Ted Baillieu vowed to keep the budget in surplus despite plunging stamp duty revenue and rising unemployment.

State Treasury's latest budget update has revealed the government ran up a $341 million deficit during the final six months of 2011, compared to a surplus of $482 million for the same period in 2010.

The deterioration came as a prominent business leader, Bank of Melbourne head Elizabeth Proust, said Victoria had invested too little in infrastructure over decades, resulting in Melbourne "strangling in its own traffic" and having an inadequate train system.

"It's not just this government, it's all of them," Ms Proust told the Committee for Melbourne. "It doesn't all need to be done by the state there is a role for public-private partnerships but we do need to invest in vital transport infrastructure.

"Our train system is still pretty much 19th century the tracks haven't been extended much since," she said. Melbourne, she said, should learn from other cities such as Singapore, which has built a metro network virtually from scratch over the past 20 years.

Ms Proust, who was head of the Premier's Department in the 1990s during the Kennett era, questioned the Baillieu government's timing in deciding to axe 3600 jobs at a time when Victoria is losing 1000 jobs a week.

She warned that the high dollar would cost many more jobs in manufacturing, tourism and education, but urged the government to respond by lifting investment in infrastructure and skills, rather than trying to prop up threatened jobs.

Mr Baillieu said he wanted to "restore financial responsibility" to Victoria, and blamed the previous Labor government and Canberra for a sharp deterioration in the state's financial position and rising public debt. "I think every Victorian family is concerned about jobs . . . and that's why we want to ensure we have a sustainable budget position," he said.

The comments came after the release of Treasury figures that suggest the government will need to consider inflicting further cuts to deliver on its promise to keep the budget in surplus by at least $100 million.

Stamp duty revenue has been particularly weak, with $1.7 billion collected during the final six months of 2011, $360 million less than the same six-month period in 2010.

Net debt also swelled by $3.4 billion to $15.3 billion. That pushed up the state's half-yearly interest bill up by $129 million to $592 million, equivalent to more than $21 million a week.

Treasury warned the results were an "imperfect guide" to the 2011-12 budget, because they did not include land tax revenue that tended to increase in the March quarter, or delayed payments from the Commonwealth for the regional rail project and the Victorian Comprehensive Cancer Centre project.

Shadow treasurer Tim Holding said said the figures showed the budget position deteriorating and debt "skyrocketing" as infrastructure investment declined.

"At the very time when our economy, when our community, desperately needs investment in infrastructure projects that will create jobs, we've got a state budget update . . . which shows that the budget position has deteriorated, our investment in infrastructure is deteriorating, the economy is grinding to a halt (and) employment continues to weaken," Mr Holding said.

Treasury said the state economy was facing "head winds" linked to the strong dollar, which had eroded the competitiveness of manufacturing. The state now losing more than 1000 jobs a week, and a drop in the number of house sales had crimped stamp duty collections.

"Weak consumer sentiment is also dampening consumer demand, which has been reflected in the relative poor performance of the retail sector," it said. "These conditions have translated into a softening of state taxation revenue and goods and service tax receipts."

The figures showed the government collected $862 million in gambling taxes, up $19 million from the previous year, and $265 million in fines.

Mr Baillieu suggested he would not use debt to finance future infrastructure. "The debt is increasing because Labor infrastructure commitments were unfunded other than by increasing debt, and then we had the GST withdrawn by the Commonwealth government."

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Victoria's economy has gone cold, neither government will fix it without a budget deficit

Victoria's economy has gone cold, and neither the federal nor state government can do much to stop it without putting their budgets in deficit.

Ted Baillieu has the bigger problem. Victoria is copping the brunt of job losses and stagnant spending caused by the high dollar, excessive interest rates, and a range of other factors.
Victoria is now either in recession or close to it. Yesterday's figures show the state is losing 5000 jobs a month. Since April, 42,000 full-time jobs - one in 50 - have been wiped out.

Wednesday's figures showed total spending in Victoria shrank in the December quarter.

Our economy needs stimulus. But Tuesday's figures told us the state's revenue base has collapsed. And on Wednesday, Treasury secretary Martin Parkinson said the federal tax base had collapsed too.

Victorian Treasurer Kim Wells is facing a perfect storm. Job losses mean less payroll tax. Cautious consumers mean less GST. Falling house prices mean less stamp duty. Even gambling has stopped growing. It wasn't why Team Baillieu decided to scrap 3600 public service jobs, but it's a good reason to do it.

But to do it now risks making the state's downturn worse. In the '90s Victoria's unemployment rate peaked, not under Labor, but under the Kennett government, because of its job cuts. The lesson from that was: take your time and deliver the pain when it's most easily absorbed.
Wayne Swan has locked himself into a surplus in 2012-13. Now he has to deliver it in an economy already slowing and with company tax revenues flat, which requires even bigger spending cuts. That will add to unemployment, and it makes no economic sense.

Both treasurers should listen to International Monetary Fund chief Christine Lagarde: don't make things worse by cutting spending hard now, she says. Instead, deliver reforms that make your budget stronger over the medium and long term. Australia and Victoria have low debt levels. That gives them the flexibility to make their budgets fit the circumstances.

Baillieu and Wells have options. First, their staff cuts could be made a medium-term goal, to be implemented as the economy picks up. Second, they could turn up the tap of spending on productivity-enhancing transport infrastructure: road, rail, level crossings. And third, they should say a firm ''no'' to the inflexible budget rules proposed by the Vertigan inquiry. The state must be free to respond to the economic situation.

Swan, alas, has already bound his own hands, and will therefore inflict a contractionary budget on an economy needing stimulus. A bolder government than his would break its budget pledge, and tell us honestly why it matters more to keep the economy going than to balance the 2012-13 budget.

Instead, it would seize its chance to tackle the big long-term threat to the budget: the ageing population. The pension age should be raised to 70, not 67 - and start rising before the baby boomers retire, not after the horse has bolted.

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