The Federal Government has compiled a mini budget in a bid to return the budget to surplus next year, but the controversial measure is unlikely to impact small business.
Last week, the Government’s expenditure review committee signed off on deep budget cuts, which will be revealed in the mid-year budget review within the next two weeks.
Emphasising a tougher approach, the ERC has adopted spending cuts nominated by Finances and Treasury, rather than cuts nominated by spending departments alone.
Reports suggest a tougher fiscal policy will leave more room for interest rate cuts, which will also limit the rise of the Australian dollar and its effect on the economy’s non-resources sectors.
Slowing domestic growth, flowing on from Europe’s woes, has put a hole in government revenues, which ministers have been forced to cover with new spending cuts.
It was also necessary to cover new spending initiatives, including last week’s announcement of a $2 billion bill to fund an increase in the wages of low-paid female workers.
The mini budget, within the mid-year review, will be the first major round of spending cuts unveiled outside the annual budget since the Hawke Government’s 1989 economic statement.
According to reports, one of the Government’s prime cost-cutting targets is the health portfolio, with the Government anxious to identify savings to help prevent a blow-out in health spending.
Spending on defence, and social security and welfare, is also expected to take a hit.
The task of finding savings, and delivering surplus in 2012-13, has been constrained by the large commitments made in the carbon price package, which cannot be undone.
Formally known as the mid-year economic and fiscal outlook, or MYEFO, the mid-year review will include spending cuts for 2012-13 to prop up the budget bottom line.
The ERC delivered some spending cuts in last year’s MYEFO but these amounted to just $337 million in net terms, with increased spending in 2010-11 offset by savings in later years.
In the budget review brought down earlier this year, the Government also had to find spending offsets for a collapsing revenue base.
It contained $22 billion of spending cuts, including measures aimed at enticing people to enter the workforce. However, global economic conditions have hindered the government’s efforts.
In his weekly economic note, Treasurer Wayne Swan said it has become clear “that every economy in [the Asia-Pacific] region is feeling the impact of events in Europe”.
“It’s hitting the region’s financial markets, unsettling businesses and consumers, and dampening trade,” Swan said.
“Obviously, this flows through to government revenues, and will add to the $130 billion in revenue write-downs we’ve seen since the global financial crisis stuck.”
“It will make the task of returning the budget to surplus in 2012-13 a lot tougher, but we’re determined to get there.”
“The hit to government revenues caused by the global turbulence means we’ll have to continue making tough budget decisions.”
Last week, Deloitte Access Economics warned the government’s financial position has deteriorated sharply since the release of the Federal Budget.
It predicts the deficit for the current financial year will be almost $9 billion deeper than forecast, and will still be in the red in 2012-13 despite government estimates of a $3.5 billion surplus.
Figures released by the Government last month show revenue collection in the first two months of the financial year were $116 million lower than expected.
Meanwhile, the deficit was almost $790 million larger than anticipated.
The Reserve Bank has slashed 0.5% from its growth forecasts in the past three months to reflect deteriorating economic conditions.
Deloitte Access Economics estimates total tax revenue will fall $3.97 billion short of Treasury expectations in 2011-12, largely due to a $4.9 billion shortfall in company tax.