Business groups welcome cuts in mini budget, but economists say surplus push driven by politics

Business groups have welcomed the fiscal tightening in the Government’s Mid-Year Economic and Fiscal Outlook, although economists have questions whether the Government’s determination to return to surplus is being driven by politics or sensible policy.

Executive director of the Council of Small Business of Australia Peter Strong said the budget wasn’t “particularly hard”.

“I’ve seen worse budget cuts over the years,” he says.

“From all we’re hearing the European crisis has a lot of people quite concerned.

“There needed to be a response. And I think this is a responsible one.”

Strong told SmartCompany he was encouraged by recent moves by the Government to engage with small business issues, and that improvements for small business didn’t have to cost the government money.

“They’re willing to talk about some supports for small business that can be done and have no effect for the Government budget, around compliance costs and negotiations. There is no cost to the budget but there is a gain for the economy.”

BCA president Tony Shepherd was similarly approving.

“The unmistakable lesson from economic developments around the world is the fundamental importance of governments living within their means,” he said in a statement.

Shepherd said the Government’s drive towards a surplus was important for building confidence in the economy, both domestically and to international investors.

“Foreign investor sentiment does have an impact on the cost at which Australia borrows to fund the investment it needs – investment that ultimately drives productivity and economic growth. “

“The benefits of this can be seen in the AAA credit rating – and therefore a relatively lower cost of capital – that Australia continues to enjoy.

“However, if the situation in Europe and around the globe deteriorates rapidly, the Government ought to have the capacity to be able to reconsider its position on the surplus.”

Westpac economist Andrew Hanlan said the fiscal package was a “careful balancing act”.

The Government eased fiscal policy for 2011/12 but introduced measures which generate net savings in the following years. This achieves the twin objectives of supporting economic activity in the near-term, while the global outlook is less positive, and of strengthening the budget position beyond that.

CommSec economist Savanth Sebastian said the update confirmed the group’s long-standing view that previous budget forecasts were substantially optimistic.

He pointed to the nearly $15 billion blowout in the deficit over 2011/12 from the June budget.

“It is important to realise that the latest forecasts are just that – forecasts. In fact over the past 18 months the forecast budget deficit forecast has blown out from the initial estimate of $13 billion to the latest forecast of $37.1 billion.”

“The European debt crisis would have certainly contributed to the blowout in the budget deficit but not to the extent attributed to by the Government.

“Rather both the Government and the Reserve Bank have under-estimated the extent of consumer conservatism and overall lack of activity outside the mining sector.”

Sebastian said that although the Government should be applauded for keeping its commitment to reaching a surplus, it was a political need rather than an economic one.

In a report on the economic impact of the Australian budget released yesterday, Colonial First State was bearish about the likely effect of the cuts contained in the mid-year economic update, saying they presented “a significant fiscal contraction for the Australian economy”.

“This has contributed to a weaker near-term outlook for the Australian economy with both lower growth and employment growth forecasts.”

The investment group said the fiscal contraction will coincide with weaker global economic growth, with growing downside risks to the Australian economy and an already weaker inflation outlook.

“This tighter fiscal policy stance is now likely to leave room for the Reserve Bank of Australia to continue its path of easing monetary policy,” making a December interest rate cut “certainly a possibility”.

Sebastian however cautioned the budget on its own was unlikely to lead to lower interest rates.

“If the Reserve Bank does cut interest rates next week it will be due to the ongoing sovereign debt issues in Europe rather than domestic economic conditions.”



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