Labor will fight inflation by taking a “hardline” approach to government spending, designed to achieve a massive $18 billion budget surplus in 2008-09, Prime Minister Kevin Rudd says.
Speaking before an address to business leaders in Perth this morning, Rudd signalled that the Government would slash spending in order to announce a projected surplus equivalent to 1.5% of GDP in the federal budget in May.
Rudd said revised inflation forecasts of 3% or more for 2008 meant that the $10 billion in savings Labor promised during the election campaign last year would not be enough.
“We will be looking to make savings beyond that through our razor gang,” Rudd says. “Department by department, program by program, line by line.”
Achieving the bumper budget surplus will require Labor to increase amounts saved from cuts to public spending by up to $5 billion. Rudd and Treasurer Wayne Swan have yet to nominate which programs will be cut or abolished to achieve the savings, but both have reiterated that personal tax cuts worth $31 billion will be delivered.
“When it comes to the tax cuts, they have been earned by the Australian people,” Swan says. “These tax changes which we put forward for a long period of time will provide the incentive for people to work harder and for people to re-enter the workforce.”
JP Morgan senior economist Stephen Walters is just one of many high-profile economists who have questioned whether Labor should deliver the full measure of the tax cuts in the current climate.
“A key driver of inflation in the last couple of years has been public spending or tax cuts – both will contribute to demand – so if the Government is going to cut back on spending and perhaps cut back on the tax relief delivered, then all other things being equal that does take off some pressure on inflation,” Walters says.
But the economic storm clouds on the horizon because of the international credit squeeze means it is not certain Rudd will be able achieve his goal, Walters says.
“I’m sceptical about if they’ll get there. The global economy is starting to weaken away, and if that affects our terms of trade, which (in raising commodities prices) have been a huge driver of government revenue, some of that deterioration will hurt the budget bottom line.”
A key reason for Rudd and Swan’s public statements on the budget surplus at this stage may be to ease pressure on the Reserve Bank of Australia to lift interest rates when it meets in February.
The level of inflationary pressures – now forecast to sit at or above 3% for 2008 – means the RBA is still more likely than not to lift rates, according to Access Economics director Chris Richardson.
“My criticism would be it’s just not enough, and I doubt it will make or break the RBA’s decision to raise interest rates or not in a couple of weeks,” Richardson says.
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