This document summarizes Professor Ian Harper's comments on the 2012-13 Australian Federal Budget. It notes that while the budget projections show steady GDP and unemployment rates, Australia is experiencing a two-speed economy with booming mining investment and employment in the northwest and slower growth in the southeast. It also questions whether the budget's projected surplus and fiscal contraction will actually occur and discusses implications for monetary policy.

1. What state are we in?
Comments on the 2012-13 Federal Budget
9 May 2012
Professor Ian Harper
Deloitte Access Economics

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Source: Deloitte Access Economics; Budget Statement No 2
2010-11 2011-12 2012-13 2013-14
GDP growth – Budget (%) 2.0 3.0 3.25 3.0
GDP growth – DAE (%)
2.0 2.9 3.2 3.5
Unemployment – Budget (%) 4.9 5.25 5.5 5.5
Unemployment – DAE (%)
5.1 5.3 5.5 5.5
CPI – Budget (%)
3.6 1.25 3.25 2.5
CPI– DAE (%)
3.1 2.6 3.2 2.8
Wages – Budget (%)
3.8 3.5 3.75 3.75
Wages– DAE (LPI)(%)
3.8 3.6 4.0 4.2
Current account balance - Budget
-2.4 -3 -4.75 -6
Current account balance – DAE
(% of GDP) -2.4 -2.7 -3.9 -4.3
A ‘beautiful’ set of (aggregate) numbers

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Source: Budget Statement No 1
But they conceal the two-speed economy

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Source: RBA 1861-2009, Maximising growth in a mining boom, (2011) Ed Shann, 2009-2014.
Unprecedented boom in mining investment

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The ‘Brisbane Line’
North-west of Brisbane Line
20% of employment
53% of investment projects
South-east of Brisbane Line:
80% of employment
47% of investment projects
Source: ABS 6291.0.55.001, Deloitte Access Economics’ Investment Monitor

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• The Budget is projected to return to surplus in 2012-13
– a 1.4% of GDP increase in revenue and a 1.0% of GDP decline in
expenditure, one of the sharpest fiscal contractions on record
The Budget and the two-speed economy - 1
Source: Budget Statement No 1

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Source: IMF world economic outlook, Treasury
Debt and deficits

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• Spreading the benefits of the boom
– Increase in Family Tax Benefit Part A
– New supplementary allowance for people on income support payments
– The new Schoolkids bonus
– Lifting the tax free threshold from $6,000 to $18,200
• Helping business to invest
– Carry-back tax losses
– Tax breaks for small business (but delaying company tax break of 1%)
• Building a more productive workforce
– National Partnership Agreement on Skills Reform
– New skills measures to assist mature age workers
• Building productivity by investing in infrastructure
– Duplicate the Pacific Highway by 2016
– $350 million per year for Roads to Recovery program
– $232 million towards the Torrens and Goodwood rail project in Adelaide
The Budget and the two-speed economy - 2

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Source: Reserve Bank of Australia; Australian Stock Exchange
Implications for monetary policy

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• Will the projected Budget surplus actually materialise?
• Will the planned fiscal contraction do more harm than good to the
non-resource sectors of the economy?
• Will conditions in Europe deteriorate to the point that we need further
fiscal stimulus?
• Will commodity prices fall sufficiently to slow even the resources
sector of the economy?
• Will the Budget boost the confidence of the cautious consumer?
Unresolved questions

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