ANZ Budget Night dinner 1 3 th May 2 0 0 8 Saul Eslake w ith the - - PowerPoint PPT Presentation

1

I nitial assessm ent of the 2 0 0 8 -0 9 Federal Budget

Saul Eslake

w ith the assistance of Riki Polygenis & Alex Joiner

1 3 th May 2 0 0 8

ANZ Budget Night dinner

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The econom ic and political context

3

Banks’ short-term funding costs Corporate bond yield spreads Share prices

The 2 0 0 8 -0 9 Budget has been brought dow n against the background of a serious global financial crisis

25 50 75 100 125 Dec-06 Jun-07 Dec-07 Jun-08

90-day Libor spread

• ver OI S (bp)

US Australia

Banks’ long-term funding costs

25 50 75 100 125 150 Dec-06 Jun-07 Dec-07 Jun-08

5-year swap spread (bp)

US Australia 50 100 150 200 250 300 Dec-06 Jun-07 Dec-07 Jun-08

AA spread over 5-7 yr gov't bond yields (bp)

US Australia 75 80 85 90 95 100 105 Dec-06 Jun-07 Dec-07 Jun-08

31 Dec 2006 = 100

US Australia

Note: all data shown as 5-day moving averages. Sources: Bloomberg; Datastream.

4

0 .0 0 .5 1 .0 1 .5 2 .0 2 .5 3 .0 3 .5 4 .0 9 0 9 5 0 0 0 5 1 0

% change

The financial crisis m ay be easing, but its full effects

• n m ajor industrialized econom ies are yet to be felt

1 ¼ 1 ¼ 2 .7 OECD 1 ½ 1 ¼ 2 .1 Japan 1 ½ 1 ½ 2 .6 Euro area 1 ½ ¾ 2 .2 US 2 0 0 9 2 0 0 8 2 0 0 7

Real GDP grow th

7 m ajor advanced econom ies

Sources: IMF; Budget Paper No. 1.

5

I n the developing w orld, by contrast, strong econom ic grow th is continuing …

4 3 ¾ 5 .2 Australia’s MTPs* 4 4 5 .0 W orld 4 ¾ 4 ¼ 5 .8 Other East Asia 7 ¾ 7 ½ 7 .9 I ndia 9 ½ 1 0 1 1 .4 China 2 0 0 9 2 0 0 8 2 0 0 7

Real GDP grow th

Developing econom ies

0 .0 1 .0 2 .0 3 .0 4 .0 5 .0 6 .0 7 .0 8 .0 9 .0 9 0 9 5 0 0 0 5 1 0

% change * Major trading partners

Sources: IMF; Budget Paper No. 1.

6

5 0 7 5 1 0 0 1 2 5 1 5 0 1 7 5 2 0 0 2 2 5 2 5 0 2 7 5 3 0 0 3 2 5 9 0 9 5 0 0 0 5 1 0

2000- 01 = 100

Australian export com m odity prices

( US$ term s)

Sources: RBA; ANZ forecasts.

… and w ill prolong the com m odities boom for at least another year …

7

Australia’s term s of trade

( ratio of export to im port prices)

Sources: ABS; Budget Paper No. 1, Statement 3.

… providing a further huge boost to Australia’s national disposable incom e …

5 0 7 5 1 0 0 1 2 5 1 5 0 1 7 5 5 0 6 0 7 0 8 0 9 0 0 0 1 0

2005- 06 = 100

• 3
• 2
• 1

1 2 3 4 5 6 7 9 0 9 5 0 0 0 5 1 0

% ch. from previous year

Real GDP Real GDI

Real gross dom estic incom e ( GDI ) and product ( GDP)

8

… and pushing real and nom inal GDP grow th in

• pposite directions
• 2

2 4 6 8 1 0 1 2 9 0 9 5 0 0 0 5 1 0

% ch. from previous year

Real GDP Nom inal GDP

Real and nom inal GDP

1 2 3 4 5 6 7 9 0 9 5 0 0 0 5 1 0

% ch. from previous year Previous forecast

I m plicit price deflator

• f GDP

Sources: ABS; Budget Paper No. 1, Statements 3 and 13.

9

• 3 0
• 2 0
• 1 0

1 0 2 0 3 0 4 0 5 0 6 0 7 0 Russia Nor- w ay Aus- tralia Can- ada NZ Ger- m any UK France US Korea Japan

% I ncluding 2008 increases in coal & iron ore prices

Australia’s has gained m ore than m ost econom ies from rising com m odity prices

Changes in the term s of trade, Mar qtr 2 0 0 3 – Dec qtr 2 0 0 7

Source: RBA Statement on Monetary Policy May 2008.

10

Contribution to change in GDP

• f Budget policy decisions

0 .0 0 .5 1 .0 1 .5 2 .0 2 .5 2 0 0 2 -0 3 2 0 0 3 -0 4 2 0 0 4 -0 5 2 0 0 5 -0 6 2 0 0 6 -0 7 2 0 0 7 -0 8 Tax cuts and concessions I ncreased spending Pc points

Successive Federal budgets have provided additional stim ulus to incom e and spending

Sources: Budget Papers (2002-03 through 2007-08); ANZ.

11

“The recent growth in spending stands out, along with the growth in spending under the Whitlam Government in 1974-75 and the increased spending following the recessions in 1982-83 and 1990-91 … particularly … given Australia has experienced 17 consecutive years of real growth.” “… the number of decisions announced in the Budget or Budget updates … has more than doubled over the past decade … in 1997-98, close to a third of all measures had a savings component, whereas more recently savings measures have averaged 15% of total measures.” “… since 1997-98 … tax expenditures have grown by 51% in real terms”

(“A perspective on trends in Australian Government spending”, Treasury Economic Report, Summer 2008, pp 27-49.

Treasury’s view of recent trends in governm ent spending

12

• 2
• 1

1 2 3 4 5 6 7 8 0 0 0 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8

% change from year earlier

Dom estic final dem and Dom estic supply ( GDP + net draw - dow n of stocks)

Dom estic dem and vs ‘supply’

Sources: ABS; ANZ.

Not surprisingly, grow th in dom estic dem and has exceeded grow th in supply by a w idening m argin

13

Consum er prices

Note: excludes impact of introduction of GST and major health policy changes. Sources: ABS; RBA.

Australia’s ‘underlying’ inflation rate is now at its highest level since inflation-targeting began

1 2 3 4 5 6 7 8 9 0 9 4 9 8 0 2 0 6 1 0

% change from year earlier

Reserve Bank forecasts "Headline" "Underlying" RBA target range

14

Contributions to ‘headline’ inflation, year to March quarter 2 0 0 8

1 2 3 4 5

% pt contribution to change in CPI

Food Energy Other Food Housing Financial services Other

"Tradeable" "Non- tradeable"

The rise in inflation has been broadly-based, and not solely due to global forces or in resource-rich States

1 2 3 4 5 0 3 0 4 0 5 0 6 0 7 0 8

% ch. from previous year Brisbane, Perth & Darw in Sydney, Melbourne, Adelaide, Hobart & Canberra

‘Headline’ inflation, resource boom cities vs others

Sources: ABS; ANZ.

15

The Reserve Bank is particularly concerned at the uptrend in inflation expectations

Household inflation expectations

Sources: Westpac-Melbourne Institute; nab.

1 2 3 4 5 6 0 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8

% pa Actual Trend

Business selling price expectations

1 2 3 4 5 6 0 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8

% pa Actual Trend

16

2 4 6 8 1 0 1 2 1 4 1 6 9 0 9 3 9 6 9 9 0 2 0 5 0 8

% pa Standard variable m ortgage rate Cash rate

Australian interest rates

Source: RBA.

So far, m onetary policy has shouldered the entire burden of responding to rising inflation

17

Tighter financial conditions and global uncertainty have contributed to sharp falls in confidence

Consum er confidence

Sources: Roy Morgan Research; nab; ANZ

Business confidence

8 0 9 0 1 0 0 1 1 0 1 2 0 1 3 0 1 4 0 9 0 9 3 9 6 9 9 0 2 0 5 0 8

I ndex Actual Trend

• 3 0
• 2 0
• 1 0

1 0 2 0 3 0 4 0 9 0 9 3 9 6 9 9 0 2 0 5 0 8

Net balance Actual Trend

18

Kevin Rudd and W ayne Sw an are determ ined to keep all of their pre-election prom ises ( including tax cuts) – no distinction between ‘core’ and ‘non-core’ promises – and no breaking the ‘L-A-W’ on promised tax cuts First budget of a new ly-elected governm ent – opportunity to blame previous government for inherited problems – and to show how the new government will be different First budget after an election – only opportunity (given the three-year electoral cycle) to take ‘courageous’ policy decisions Other political trade-offs – for example desire to help ‘working families’ cope with rising costs of living … – … vs desire to demonstrate credentials as ‘fiscal conservatives’

And of course there are also political considerations

19

The Budget’s key decisions – and how they have been funded

20

No of tim es used in - W ord or phrase 8 1 8 ‘Reform ’ 2 5 4 9 ‘I nfrastructure’ 4 3 6 1 1 ‘I nvestm ent’ 3 5 1 ‘I nterest rates’ 7 6 3 ‘Productivity’ 2 5 5 ‘Clim ate change’ 7 7 2 7 ‘Prom ises’ or ‘com m itm ents’ 6 6 1 7 ‘I nflation’ 1 9 1 3 ‘W orking fam ilies’ Budget statem ents Budget Speech

W hat do the w ords in the Budget speech and statem ents indicate about priorities?

21

‘W indfall’ revenue gains* from Budget to Budget

( over 4 years from current fiscal year)

1 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 2 0 0 4 -0 5 2 0 0 5 -0 6 2 0 0 6 -0 7 2 0 0 7 -0 8 2 0 0 8 -0 9 From Mid-Year Outlook to Budget From previous Budget to Mid-Year Outlook $ bn

Revenue estim ates have again been revised upw ard, but by less than in previous Budget cycles

* Aka ‘parameter variations’. Sources: MYEFO and Budget Papers; ANZ.

22

Successive Budget estim ates of com pany tax revenues

4 5 5 0 5 5 6 0 6 5 7 0 7 5 8 0 8 5 2 0 0 6 -0 7 2 0 0 7 -0 8 2 0 0 8 -0 9 2 0 0 9 -1 0 2 0 1 0 -1 1 2 0 1 1 -1 2

2 0 0 5 - 0 6 Budget 2 0 0 6 - 0 7 Budget 2 0 0 7 - 0 8 Budget 2 0 0 8 - 0 9 Budget

$ bn Financial years

Projections of com pany tax collections are still being revised upw ards …

Note: chart shows estimates in cash terms. Source: Budget Statement No. 5 Table C4.

23

1 1 0 1 1 5 1 2 0 1 2 5 1 3 0 1 3 5 1 4 0 1 4 5 2 0 0 6 -0 7 2 0 0 7 -0 8 2 0 0 8 -0 9 2 0 0 9 -1 0 2 0 1 0 -1 1 2 0 1 1 -1 2

2 0 0 5 - 0 6 Budget 2 0 0 6 - 0 7 Budget 2 0 0 7 - 0 8 Budget 2 0 0 8 - 0 9 Budget

$bn

Financial years

Successive estim ates of personal incom e tax revenues

… w hile projections of personal incom e tax revenue are still being low ered ( by tax cuts)

Note: chart shows estimates in cash terms. Source: Budget Statement No. 5 Table C4.

24

Successive estim ates of super fund tax revenues

5 6 7 8 9 1 0 1 1 1 2 1 3 1 4 2 0 0 6 -0 7 2 0 0 7 -0 8 2 0 0 8 -0 9 2 0 0 9 -1 0 2 0 1 0 -1 1 2 0 1 1 -1 2

2 0 0 5 -0 6 Budget 2 0 0 6 -0 7 Budget 2 0 0 7 -0 8 Budget 2 0 0 7 -0 8 MYEFO 2 0 0 8 -0 9 Budget

$bn

Financial years

Estim ates of revenue from taxes on superannuation funds have been revised dow n since the election …

Note: chart shows estimates in cash terms. Source: Budget Statement No. 5 Table C4.

25

Successive estim ates of capital gains tax revenues

1 0 1 2 1 4 1 6 1 8 2 0 2 2 2 0 0 5 -0 6 2 0 0 6 -0 7 2 0 0 7 -0 8 2 0 0 8 -0 9 2 0 0 9 - 1 0 2 0 1 0 -1 1 2 0 1 1 -1 2

2 0 0 7 -0 8 Pre-Election Fiscal Outlook 2 0 0 8 -0 9 Budget

$bn

Financial years

… as have estim ates of capital gains tax revenues

Note: chart shows estimates in cash terms. Projections of capital gains tax collections have not previously been published. Source: Budget Statement No. 5 Box 3.

26

+ 1 9 .0 + 1 .8 + 2 .1 1 4 .9

• 1 8 .0

+ 2 0 .6 1 7 .5 1 1 -1 2

• 6 5 .0
• 1 8 .0
• 1 3 .8
• 1 0 .9
• 4 .3

‘Policy decisions’ 7 9 .4 + 2 0 .6 + 1 7 .7 + 1 2 .5 + 8 .0 ‘Param eter variations’ + 6 7 .1 1 2 .5 1 3 .8 1 2 .7 1 0 .6 As at May 2 0 0 7 + 1 9 .0 + 1 .9 + 2 .1 1 5 .0 1 0 -1 1 + 2 .9 0 .0 + 2 .0

• 2 .8

‘Policy decisions’ + 1 6 .8 + 1 .9 + 5 .4 + 5 .2 ‘Param eter variations’ + 9 6 .2 + 1 9 .7 + 2 1 .7 + 1 6 .8 As at May 2 0 0 8 + 7 6 .3 1 7 .7 1 4 .3 1 4 .4 As at October 2 0 0 7 Total 0 9 -1 0 0 8 -0 9 0 7 -0 8

Reconciliation of successive estim ates of the ‘underlying’ cash balance ( $ bn)

Note: ‘Parameter variations’ are changes in spending or revenue projections arising from changes in economic assumptions, changes in the revenue yield from particular taxes, ‘slippage’ in implementation of policy decisions, etc. Also note that the tax cuts originally proposed by the Howard Government are included in the pre-October 2007 ‘policy decisions’ row, while the savings from the Rudd Government’s decision to defer the proposed cut in the top tax rate are in the pre-May 2008 ‘policy decisions’ row. * Economics@ANZ estimate. Source: Budget Statement No. 3, ANZ calculations.

‘Policy decisions’ have been self-funded, w hile revenue w indfalls have been ‘banked’

27

• 4 6 .7
• 1 5 .9
• 1 3 .9
• 9 .8
• 7 .1
• Tax cuts
• 4 3 .8
• 1 4 .1
• 1 2 .0
• 9 .7
• 5 .1
• 2 .8

New policy incl. tax cuts* 2 .9 1 .8 1 .9 0 .0 2 .0

• 2 .8

Net saving 2 9 .4 7 .2 7 .5 6 .1 7 .3 1 .3 Other 5 .3 2 .2 2 .0 1 .2

• Cuts in top tax rate
• 1 .0 0
• 0 .1 3
• 7 .6

9 .4 1 1 -1 2

• 3 1 .8
• 7 .6
• 7 .2
• 5 .3
• 4 .1

New policy 3 4 .7 9 .5 7 .2 7 .3 1 .3 Total Saving m easures -

• 0 .9 0
• 0 .1 4

1 0 -1 1

• 0 .6 8
• 0 .7 5
• 0 .4 1
• 0 .2 5

as a % of GDP

• 0 .0 5

0 .0 0 0 .1 6

• 0 .2 5

as a % of GDP

Total 0 9 -1 0 0 8 -0 9 0 7 -0 8

Saving and new policy m easures in the Budget

* Excludes ‘saving’ from deferring cut in top tax rate. Source: Budget Statement No. 3, ANZ calculations.

Nonetheless, the net effect of policy m easures is very sm all ( and still expansionary if tax cuts are counted)

28 * Personal income tax cuts including those approved by Coalition before election, net of deferral of cuts for high-income earners by Rudd Gov’t. †Excluding Coalition tax cut.

• 2 7 .0
• 9 .2
• 7 .6
• 5 .7
• 4 .8

0 .2 Total ( incl. other) 1 .3 0 .3 0 .7 0 .3 0 .0

• Softw are depreciation

0 .5 0 .1 0 .1 0 .1 0 .1

• Airport tax

0 .6 0 .1 0 .1 0 .1 0 .1

• Luxury car tax

1 .4 0 .5 0 .4 0 .3 0 .2

• FBT exem ptions

2 .0 0 .8 0 .8 0 .3 0 .1

• ATO com pliance

2 .5 0 .6 0 .6 0 .6 0 .5 0 .1 Condensate excise 3 .2 0 .9 0 .8 0 .7 0 .6 0 .1 ‘Alco-pops’ etc. excise

• 0 .7
• 0 .2
• 0 .2
• 0 .2
• Medicare surcharge

Net change in revenues ( $ bn) 0 .2

• 0 7 -0 8
• 0 .6
• 0 .2
• 0 .2
• 0 .1

0 .0 W ithholding tax cut + 6 .6

• 1 3 .7

1 1 -1 2 1 9 .8 + 6 .4 + 4 .1 + 2 .4 Total in Budget Papers†

• 3 4 .3
• 1 1 .9
• 8 .6
• 7 .1

Personal incom e tax cuts* Total 1 0 -1 1 0 9 -1 0 0 8 -0 9

Major policy decisions: revenues

29

• I ncom e tax cuts

– 30% threshold lifted from $30K to $37K by 2010 – 40% threshold lifted from $75K to $80K and rate dropped to 38% from 2009 and to 37% by 2010 – 45% threshold lifted from $150K to $180K from Jul 08 – Low Income Tax Offset (LITO) changes lift effective tax free threshold from $11K to $16K by 2010 – deferral of tax cuts for those over $180K saves $5.3bn over 4 years

• Luxury car tax

– Sales tax on vehicles costing over $57K rises from 25% to 33% (revenue of $555mn over four years)

• Medicare levy surcharge threshold lifted from $ 5 0 K to $ 1 0 0 K

– Cost to revenue of $600mn over four years

• I ncreased excise on ‘ready-to-drinks’

– $3.1bn over four years to fund preventative health programs

• Rem ove FBT exem ptions for on-prem ises m eals and em ployer-

provided w ork-related item s ( incl laptops, PDAs) unless used prim arily for w ork purposes

– $1.3bn additional revenue over four years

Major revenue decisions

30

• I ncreased ‘passenger m ovem ent charge’

– $459mn of additional revenue over four years

• I ncreased ‘com pliance activities by ATO’

– $2bn over four years

• 3 0 % non-final w ithholding tax on distributions to foreign

investors to be replaced ( for countries w ith w hich Australia has exchange of inform ation agreem ents) w ith

– 22.5% from 2008-09 – 15% from 2009-10 – 7.5% from 2010-11 onwards

• Com prehensive review of the tax system

– everything except rate & base of GST, and tax-free superannuation income for over-60s – discussion paper released by end-July 2008, final report by end-2009

Major revenue decisions ( continued)

31 * Personal income tax cuts including those approved by Coalition before election, net of deferral of cuts for high-income earners by Rudd Gov’t. †Excluding Coalition tax cut.

• 1 .2
• 0 .2
• 0 .3
• 0 .3
• 0 .3
• 0 .2

Scrap Access Card + 1 8 .0 + 4 .8 + 4 .5 + 4 .2 + 1 .3 + 3 .0 Total ( incl. other) 2 .2 0 .9 0 .6 0 .4 0 .2

• Housing affordability
• 1 .8
• 0 .4
• 0 .4
• 0 .4
• 0 .4
• 0 .1

‘Efficiency dividend’ 1 .0 0 .2 0 .3 0 .3 0 .1

• Clim ate change

1 .8

• 1 .8

Seniors & carers bonuses 1 .6 0 .4 0 .4 0 .4 0 .3

• Child care tax rebate

3 .3 0 .5 0 .8 0 .7 0 .6 0 .7 Health & hospitals 1 3 .6 3 .8 3 .4 3 .1 2 .6 0 .6 Other ‘education revoln'

• 3 .7
• 0 .9
• 0 .9
• 0 .9
• 0 .8
• 0 .2

Axing Coalition program s Net change in outlays ( $ bn)

• 0 7 -0 8
• 1 .2
• 0 .5
• 0 .4
• 0 .2
• 0 .2

Means testing 1 .2 1 1 -1 2 4 .4 1 .1 1 .1 1 .0 Education tax refund Total 1 0 -1 1 0 9 -1 0 0 8 -0 9

Major policy decisions: spending

32

Cabinet m ust have agonized over these ones …

3 .0 Continence Managem ent advertising cam paign 3 7 6 .3 Total of above 3 2 .5 I llicit Drugs in Sport advertising cam paign 1 9 .8 Citizenship Test advertising cam paign 9 .7 I llicit Drugs & Mental I llness advertising cam paign 2 3 6 .2 Regional Partnerships Rorts Grants 2 .5 National Training Centre for Aerial Skiing 4 4 .6 Making Canberra’s Constitution Ave a boulevard 3 .0 Fishing Hall of Fam e Abandoned / cancelled program 2 5 .0 Australian National Rugby academ y Saving

33

The Budget’s bottom lines

34

‘Underlying’ cash surplus

1 6 .8 2 1 .7 1 9 .7

1 8 .9

1 9 .0 5 1 0 1 5 2 0 2 5 2 0 0 6 -0 7 2 0 0 7 -0 8 2 0 0 8 -0 9 2 0 0 9 -1 0 2 0 1 0 -1 1 2 0 1 1 -1 2 Pre-Election Fiscal Outlook 2 0 0 8 -0 9 Budget $ bn *

The ‘underlying’ cash surplus is the cash surplus net of sales of financial assets and net advances to State and Territory governments. * ANZ estimate Source: 2007 Pre-Election Fiscal Outlook; 2008-09 Budget Paper No. 1

1 7 .2

Projected cash surplus 1 .8 % of GDP in 2 0 0 8 -0 9 , then declining tow ards 1 .6 % of GDP by 2 0 1 1 -1 2

35

1 7 ,2 0 8 1 3 ,6 3 0 1 1 ,8 2 7 1 0 ,8 2 8 2 0 0 6 -0 7 1 5 ,7 9 2 1 4 ,8 0 5 1 1 ,4 5 2 8 ,9 2 1 2 0 0 5 -0 6 Estim ates of the ‘underlying’ cash balance ( $ m illion) 7 ,4 8 6 3 ,9 1 8 2 ,1 4 1 2 ,0 9 4 2 0 0 2 -0 3 1 6 ,8 1 5 1 4 ,8 3 4 * 1 0 ,6 3 7 2 0 0 7 -0 8 2 ,7 0 7 3 ,3 6 9 4 ,7 3 4 Average ‘error’ 1 3 ,6 1 6 8 ,0 3 6

• 1 ,0 6 3

5 ,9 7 1 Final

• utcom e

( June) 9 ,2 2 8 6 ,2 0 6 2 ,3 9 1 2 0 0 4 -0 5 4 ,5 8 5 4 ,6 3 5 3 ,6 6 5 2 0 0 3 -0 4

• 1 ,1 9 3

5 0 2 1 ,5 2 0 2 0 0 1 -0 2 2 ,2 5 3 4 ,3 2 9 2 ,8 4 4 2 0 0 0 -0 1 Third estim ate ( May) Second estim ate ( Decem ber) I nitial estim ate ( prvs May)

ASI C probably w ouldn’t let a com pany get aw ay w ith giving such inaccurate earnings guidance

* Mid-year estimate published in October. Sources: Budget & MYEFO Papers; ANZ.

36

5 1 0 1 5 2 0 2 5 3 0 2 0 0 6 -0 7 2 0 0 7 -0 8 2 0 0 8 -0 9 2 0 0 9 -1 0 2 0 1 0 -1 1 2 0 1 1 -1 2 'Underlying' 'Headline' $ billion

W ith no m ajor asset sales, there’s little difference betw een the ‘headline’ and ‘underlying’ surpluses

‘Underlying’ and ‘headline’ cash surpluses

Source: Budget Statement No. 1.

37

• ‘Building Australia’ fund

– $20bn over two years

• Education I nvestm ent Fund

– $5bn in 2008-09 – Plus $6bn from previous government’s Higher Education Fund

• Health and Hospitals Fund

– $10bn in 2008-09

• To be adm inistered by Future Fund guardians

How these surpluses w ill be used

38

• 2 0
• 1 5
• 1 0
• 5

5 1 0 1 5 2 0 2 5 7 0 7 6 8 2 8 8 9 4 0 0 0 6 1 2

• 5
• 4
• 3
• 2
• 1

1 2 3 4 $ bn As a % of GDP ( right scale) $ bn ( left scale) %

Com m onw ealth ‘underlying’ cash balance

Sources: 2008-09 Budget Paper No. 1, Statement 13, Table 1 (and previous issues).

Projected budget surpluses are sm aller than at previous com m odity cycle peaks

39

Treasury’s econom ic

• utlook for 2 0 0 8 -0 9

and beyond

40

Grow th drivers

• W orld econom ic grow th

slow s from 5 % in 2 0 0 7 to 4 % in 2 0 0 8 and 2 0 0 9

• Oil prices average ‘rem ain

unchanged at current levels’ ( ~ US$ 1 1 5 / bbl)

• Assum es ‘average seasonal

conditions’ in rural areas, but accounts for low er w ater storage levels

• A$ averages around TW I

7 1 ( ~ US9 3 ¢ )

• I nterest rates ‘rem ain

unchanged at current levels’

Assum ptions

• TOT forecast to reach new

highs leading to an acceleration in dom estic incom es

• Upw ard trend in export

volum e grow th, due to resource and rural exports

• Continued grow th in

business investm ent to lift production capacity

• Household spending

grow ing slow s to 2 ¾ % pa in 2 0 0 8 -0 9

• Modest grow th in dw elling

construction, m ostly in alterations and additions

Key assum ptions and influences on the 2 0 0 8 -0 9 forecast

41

Real GDP grow th

• Forecast for 2 0 0 7 -0 8 cut

from 4 ¼ % to 3 ½ %

– requires 0.5% growth in March and June quarters

• 2 0 0 8 -0 9 forecast revised

dow nw ards from 3 ½ % to 2 ¾ %

– slightly above RBA forecast

• f ~ 2½ %

– implies growth ‘through the year’ of 2¾ % – non-farm GDP growth forecast at 2¼ % cf. RBA ~ 2%

• GDP grow th of 3 % pa

assum ed for 2 0 0 9 -1 0 and beyond

1 2 3 4 5 0 6 - 0 7 0 7 - 0 8 0 8 - 0 9 0 9 - 1 0 1 0 - 1 1 1 1 - 1 2

% change

Dow nw ard revisions "Projections"

Treasury’s forecasts for grow th in real GDP have been revised dow nw ards

42 Note: Charts show real p.c. changes for financial years ended 30 June.

Housing

• 1

1 2 3 4 0 5 0 6 0 7 0 8 0 9

% change

Business investm ent

5 1 0 1 5 2 0 0 5 0 6 0 7 0 8 0 9

% change

1 2 3 4 5 0 5 0 6 0 7 0 8 0 9

% change

Consum er spending

1 2 3 4 5 0 5 0 6 0 7 0 8 0 9

% change

Public spending

2 4 6 8 0 5 0 6 0 7 0 8 0 9

% change

Exports

5 1 0 1 5 0 5 0 6 0 7 0 8 0 9

% change

I m ports

Private ( household and business) dem and expected to slow m oderately in 2 0 0 8 -0 9

43

Em ploym ent grow th

0.0 0.5 1.0 1.5 2.0 2.5 3.0 05- 06 06- 07 07- 08 08- 09 09- 10 10- 11 11- 12

% change

Upw ard revision Dow nw ard revision "Projections"

Unem ploym ent rate

4.00 4.25 4.50 4.75 5.00 5.25 5.50 5.75 03- 04 04- 05 05- 06 06- 07 07- 08 08- 09

% (June qtr)

Unem ploym ent forecast to head back up to 4 ½ % , but rem ain low

44

‘Headline’ inflation

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 05- 06 06- 07 07- 08 08- 09 09- 10 10- 11 11- 12

% change Upward revisions "Projections"

I nflation forecasts have been revised sharply upw ards

• 2 0 0 7 -0 8 ‘headline’ forecast

revised up from 2 ¾ % to 4 %

– implies June quarter rate still above 4%

• 2 0 0 8 -0 9 ‘headline’ forecast

revised up from 2 ¾ % to 3 ¼ %

– implies inflation over year to June quarter 2009 of 3¼ % – Underlying inflation expected to track headline inflation – Slightly lower than RBA forecast

• f 3½ % over year to June

quarter 2009

• 2 0 0 9 -1 0 onw ards are

‘projections’, not ‘forecasts’

• W ages grow th assum ed

steady at 4 ¼ %

45

Current account balance

• Deficit to narrow from 6 ¼ % of

GDP in 2 0 0 7 -0 8 to 5 % of GDP in 2 0 0 8 -0 9

• Exports to grow 6 %

– driven largely by resources exports as major investments come on stream – rural exports also expected to pick up

• I m port grow th rapid at 9 %

( from 1 1 % in 2 0 0 7 -0 8 )

– reflecting ongoing strength in business investment

• Term s of trade to rise 1 6 % in

2 0 0 8 -0 9 but then ease over rem ainder of projection period

• Higher net interest and profit

paym ents abroad partly offset im provem ent in trade balance

• 7
• 6
• 5
• 4
• 3
• 2
• 1

0 5 -0 6 0 6 -0 7 0 7 -0 8 0 8 -0 9

$ bn

Current account deficit w ill narrow next year thanks to higher export prices and slow er im ports grow th

46

Assessm ent and conclusion

47

Slightly higher than expected Budget surplus Largely as the result of continued revenue w indfalls New policy decisions have been fully funded Although there hasn’t been a ruthless assault on governm ent spending No net stim ulus to dom estic dem and The Budget doesn’t add to upw ard pressure on interest rates – but doesn’t do anything to low er them either Budget provides a politically saleable vision for investm ent of surpluses

Does the Budget truly exert ‘m axim um dow nw ard pressure on inflation and interest rates/ ?