FEDERAL BUDGET 2012: It won’t take much for the “wafer-thin” budget surplus to slip, economists warn

The Federal Government’s much lauded $1.5 billion surplus announced in last night’s budget could easily slip back into the red, according to economists.

The surplus represents a $49.5 billion turnaround in the underlying cash balance in the 2012-13 year, representing 3.1% of gross domestic product.

It’s the largest one-year fiscal tightening over the last half-century and, given that the deficit for 2011-12 has blown out from $20.3 billion in last year’s budget to $44 billion today, economists warn that delivering a $1.5 billion surplus could be a difficult task.

Craig James, chief economist at CommSec, told SmartCompany the economic assumptions underlying the budget could not be faulted and were indeed “a touch on the conservative side” but warned the margins were very tight.

“It is a wafer-thin surplus, but at the end of the day they have conjured it up [so] they have been able to issue delays and cancellations and revisions to get it,” says James.

“Not much has to go wrong for the Government to move back into the red rather than the black.”

“They are cutting spending by a significant amount, 4.3% in real terms is certainly not inconsequential, but… there is only so much you can delay or revise, eventually you will have to revisit some of these things.

“While clever, that doesn’t mean that the numbers won’t come unstuck.

“Overall, we would give reasonably high marks for the budget; it is clever and it is a Labor budget.”

HSBC chief economist Paul Bloxham said the imperative for achieving a budget surplus was more political than economic.

“In continuing to aim for a budget surplus in 2012-13, but having achieved very little of the needed fiscal unwind to get there so far, the hard work has been left to the end,” Bloxham said.

“In the end, the main drivers of whether the budget surplus will actually be achieved depends on the performance of the economy and the calibration of that performance in terms of its impact on tax revenue and spending.”

Bloxham said the Government is expecting real gross domestic product to grow by 3.25% in 2012-13 and 3.00% in 2013-14.

“A number of factors will test the plausibility of these GDP forecasts,” said Bloxham.

“There are the ever-present global risks, as well as the risk that the pulse of growth in Australia is already lower than expected.

“In addition, the fiscal contraction itself will subtract from growth – though only to the extent that it occurs.”

Bloxham said the budget projections imply a “massive” fiscal contraction to get back to surplus over the coming year, but also assume trend economic growth.

“If the projections come about, they do imply downside risk to Reserve Bank of Australia rates,” said Bloxham.

“But there is also significant risk of further fiscal slippage, given recent history of this.”


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