Questions remain despite budget pain: Economy roundup

Treasurer Wayne Swan has lived up to his promise to deliver a bumper surplus, with business in particular subjected to the budget knife in an effort to deliver fiscal discipline.

The result of all the cut programs and new charges is a substantial saving to the bottom line of $33.3 billion over four years, with $7.3 billion to be saved in the first year alone.

Those savings provide the basis for a bumper surplus in 2008-09 of $21.7 billion – 1.8% of GDP – up from $16.8 billion in the year just gone.

Swan has delivered on his promise to deliver a surplus above 1.5%, but the question that will remain unanswered for some time to come is whether Swan has got the balance right.

If he has pulled back too hard, the economy could be in for a hard landing. Treasury says the economy is set slow significantly in the year ahead, with growth falling from 3.5% in 2007-08 to 2.75% in the year ahead.

But on the other hand, inflation is set to remain at high levels, and funds will continue to flow to Government coffers via the mining sector thanks to the strongest terms of trade in 50 years.

And for all the cuts in the budget, it still does put more money into the economy, with real spending increasing by 1.1% – and much of that flowing directly into consumers’ pockets in the form of tax cuts.

Swan says he has got the balance right – any further cuts would have “hit the brakes so hard you might have had a detrimental effect on the economy,” he says.

We won’t have to wait long to judge whether or not he is right. If the Reserve Bank of Australia is forced to raise interest rates again this year, the view will be that Swan could have done more, but didn’t.

But if the economy cruises in for a soft landing – the Treasury predicts growth of around 3% between 2009-10 and 2011-12, and a within-target consumer price index of 2.5% over the same period – Swan will be vindicated.