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

I nitial assessm ent of the 2 0 0 8 -0 9 Federal Budget ANZ Budget Night dinner 1 3 th May 2 0 0 8 Saul Eslake w ith the assistance of Riki Polygenis & Alex Joiner 1

The econom ic and political context 2

The 2 0 0 8 -0 9 Budget has been brought dow n against the background of a serious global financial crisis Banks’ short-term funding costs Corporate bond yield spreads 125 300 90-day Libor spread AA spread over 5-7 yr US US over OI S (bp) gov't bond yields (bp) 250 100 200 75 150 Australia 50 100 25 Australia 50 0 0 Dec-06 Jun-07 Dec-07 Jun-08 Dec-06 Jun-07 Dec-07 Jun-08 Banks’ long-term funding costs Share prices 150 Australia 105 5-year swap spread (bp) 31 Dec 2006 = 100 125 100 US 100 95 75 90 US 50 85 25 80 Australia 0 75 Dec-06 Jun-07 Dec-07 Jun-08 Dec-06 Jun-07 Dec-07 Jun-08 Note: all data shown as 5-day moving averages. Sources: Bloomberg; Datastream. 3

The financial crisis m ay be easing, but its full effects on m ajor industrialized econom ies are yet to be felt Real GDP grow th 7 m ajor advanced econom ies % change 4 .0 2 0 0 7 2 0 0 8 2 0 0 9 3 .5 US 2 .2 ¾ 1 ½ 3 .0 Euro area 2 .6 1 ½ 1 ½ 2 .5 2 .0 Japan 2 .1 1 ¼ 1 ½ 1 .5 2 .7 1 ¼ 1 ¼ OECD 1 .0 0 .5 0 .0 9 0 9 5 0 0 0 5 1 0 Sources: IMF; Budget Paper No. 1. 4

I n the developing w orld, by contrast, strong econom ic grow th is continuing … Real GDP grow th Developing econom ies % change 9 .0 2 0 0 7 2 0 0 8 2 0 0 9 8 .0 7 .0 China 1 1 .4 1 0 9 ½ 6 .0 I ndia 7 .9 7 ½ 7 ¾ 5 .0 Other 5 .8 4 ¼ 4 ¾ 4 .0 East Asia 3 .0 5 .2 3 ¾ 4 Australia’s MTPs * 2 .0 5 .0 4 4 W orld 1 .0 0 .0 * Major trading partners 9 0 9 5 0 0 0 5 1 0 Sources: IMF; Budget Paper No. 1. 5

… and w ill prolong the com m odities boom for at least another year … Australian export com m odity prices ( US$ term s) 3 2 5 2000- 01 = 100 3 0 0 2 7 5 2 5 0 2 2 5 2 0 0 1 7 5 1 5 0 1 2 5 1 0 0 7 5 5 0 9 0 9 5 0 0 0 5 1 0 Sources: RBA; ANZ forecasts. 6

… providing a further huge boost to Australia’s national disposable incom e … Real gross dom estic incom e Australia’s term s of trade ( GDI ) and product ( GDP) ( ratio of export to im port prices) 1 7 5 7 2005- 06 % ch. from Real GDI = 100 previous year 6 1 5 0 5 4 1 2 5 3 Real GDP 2 1 0 0 1 0 7 5 -1 -2 5 0 -3 5 0 6 0 7 0 8 0 9 0 0 0 1 0 9 0 9 5 0 0 0 5 1 0 Sources: ABS; Budget Paper No. 1, Statement 3. 7

… and pushing real and nom inal GDP grow th in opposite directions I m plicit price deflator Real and nom inal GDP of GDP 7 1 2 % ch. from % ch. from previous year previous year 6 1 0 Nom inal GDP 5 8 4 6 3 4 Real GDP Previous 2 2 forecast 1 0 0 -2 9 0 9 5 0 0 0 5 1 0 9 0 9 5 0 0 0 5 1 0 Sources: ABS; Budget Paper No. 1, Statements 3 and 13. 8

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 % 7 0 6 0 I ncluding 2008 increases 5 0 in coal & iron ore prices 4 0 3 0 2 0 1 0 0 - 1 0 - 2 0 - 3 0 Russia Nor- Aus- Can- NZ Ger- UK France US Korea Japan w ay tralia ada m any Source: RBA Statement on Monetary Policy May 2008. 9

Successive Federal budgets have provided additional stim ulus to incom e and spending Contribution to change in GDP of Budget policy decisions 2 .5 Pc points 2 .0 1 .5 1 .0 0 .5 0 .0 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 Sources: Budget Papers (2002-03 through 2007-08); ANZ. 10

Treasury’s view of recent trends in governm ent spending “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. 11

Not surprisingly, grow th in dom estic dem and has exceeded grow th in supply by a w idening m argin Dom estic dem and vs ‘supply’ 8 % change from year earlier Dom estic final 7 dem and 6 5 4 3 Dom estic supply 2 ( GDP + net draw - dow n of stocks) 1 0 -1 -2 0 0 0 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8 Sources: ABS; ANZ. 12

Australia’s ‘underlying’ inflation rate is now at its highest level since inflation-targeting began Consum er prices 8 % change from year earlier 7 Reserve 6 Bank forecasts "Underlying" 5 "Headline" 4 3 2 RBA target 1 range 0 9 0 9 4 9 8 0 2 0 6 1 0 Note: excludes impact of introduction of GST and major health policy changes. Sources: ABS; RBA. 13

The rise in inflation has been broadly-based, and not solely due to global forces or in resource-rich States Contributions to ‘headline’ ‘Headline’ inflation, resource boom cities inflation, year to vs others March quarter 2 0 0 8 5 5 % pt contribution to % ch. from change in CPI previous year 4 Brisbane, Perth 4 Other & Darw in Financial 3 3 services "Non- tradeable" Housing 2 2 Food Sydney, Melbourne, Adelaide, Hobart & Canberra Other 1 1 Energy "Tradeable" Food 0 0 0 3 0 4 0 5 0 6 0 7 0 8 Sources: ABS; ANZ. 14

The Reserve Bank is particularly concerned at the uptrend in inflation expectations Household inflation Business selling price expectations expectations % pa % pa 6 6 Trend 5 5 Actual 4 4 Actual 3 3 2 2 Trend 1 1 0 0 0 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8 Sources: Westpac-Melbourne Institute; nab. 15

So far, m onetary policy has shouldered the entire burden of responding to rising inflation Australian interest rates 1 6 % pa 1 4 1 2 Standard variable m ortgage rate 1 0 8 6 Cash rate 4 2 0 9 0 9 3 9 6 9 9 0 2 0 5 0 8 Source: RBA. 16

Tighter financial conditions and global uncertainty have contributed to sharp falls in confidence Consum er confidence Business confidence I ndex Net balance 1 4 0 4 0 Actual 3 0 1 3 0 2 0 1 2 0 1 0 1 1 0 0 Trend 1 0 0 Actual Trend -1 0 9 0 -2 0 8 0 -3 0 9 0 9 3 9 6 9 9 0 2 0 5 0 8 9 0 9 3 9 6 9 9 0 2 0 5 0 8 Sources: Roy Morgan Research; nab; ANZ 17

And of course there are also political considerations � 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’ 18

The Budget’s key decisions – and how they have been funded 19

W hat do the w ords in the Budget speech and statem ents indicate about priorities? W ord or phrase No of tim es used in - Budget Budget Speech statem ents ‘W orking fam ilies’ 1 3 1 9 ‘I nflation’ 1 7 6 6 ‘Productivity’ 3 7 6 ‘I nfrastructure’ 9 2 5 4 ‘I nvestm ent’ 1 1 4 3 6 ‘I nterest rates’ 1 3 5 ‘Clim ate change’ 5 2 5 ‘Reform ’ 8 8 1 ‘Prom ises’ or ‘com m itm ents’ 2 7 7 7 20

Revenue estim ates have again been revised upw ard, but by less than in previous Budget cycles ‘W indfall’ revenue gains* from Budget to Budget ( over 4 years from current fiscal year) $ bn 8 0 7 0 6 0 5 0 4 0 3 0 2 0 1 0 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 * Aka ‘parameter variations’. Sources: MYEFO and Budget Papers; ANZ. 21

Projections of com pany tax collections are still being revised upw ards … Successive Budget estim ates of com pany tax revenues $ bn 8 5 8 0 7 5 7 0 6 5 6 0 5 5 5 0 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 Financial years 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 Note: chart shows estimates in cash terms. Source: Budget Statement No. 5 Table C4. 22