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Mining riches to go to families

The Federal Government has bypassed business tax cuts and instead funelled the benefits of the mining boom to households, softening the blow to the economy of the biggest cut in Commonwealth spending in 24 years. The Government expects the Budget to return, as promised, to a narrow $1.5 billion surplus in 2012-13 despite unexpectedly weak company tax receipts and subdued asset prices, driven by $17 billion of net savings, and expects the federal balance sheet to remain in the black through the following three financial years, rising to a surplus of $7.5 billion in 2015-16.

09 May 2012

The Federal Government has bypassed business tax cuts and instead funelled the benefits of the mining boom to households, softening the blow to the economy of the biggest cut in Commonwealth spending in 24 years.

The Government expects the Budget to return, as promised, to a narrow $1.5 billion surplus in 2012-13 despite unexpectedly weak company tax receipts and subdued asset prices, driven by $17 billion of net savings, and expects the federal balance sheet to remain in the black through the following three financial years, rising to a surplus of $7.5 billion in 2015-16.

The huge budget turnaround – from a deficit of $44.4 billion this financial year – means the Government will be a hefty drag on economic activity, equivalent to about 3.1 per cent of gross domestic product.

But the Government is banking on further cuts in official interest rates and a lift in household spending to help propel growth even as its own substantial spending cuts threaten to undermine the economy’s momentum.

Treasury has forecast a small acceleration in growth next financial year to 3.25 per cent – around the long-term average – before easing marginally to a sustained annual rate of 3 per cent between 2013-14 and 2015-16.

It expects such a rate of expansion to be sufficient to limit the rise in the jobless rate to 5.5 per cent through the next two financial years despite soft employment growth of less than 1.5 per cent.

By abandoning plans to cut the company tax rate to 29 per cent and instead re-direct the funds raised by the controversial Minerals Resource Rent Tax to handouts to households, the Government hopes to fuel the nascent recovery in household spending.

Under Budget plans, mining tax revenue will help deliver a $1.8 billion boost to recipients of Family Tax Benefit Part A, with a further $1.1 billion for increased allowances for students, young families and the unemployed, and $2.1 billion over five years to families with school-age children.

Significantly, most of the funding will go to lower and middle-income recipients, increasing the likelihood that it will be spent rather than saved, thereby providing a boost to activity.

Treasurer Wayne Swan said more than 1.5 million families would benefit from the Government’s Spreading the Benefits of the Boom package.

“ Government knows that for too many Australians, this feels like someone else’s mining boom,” Mr Swan told Parliament in his Budget speech on Tuesday night. “So…from the firm foundations of a surplus Budget, we announce new policies to spread the benefits of this boom. The Budget redirects and prioritises spending to convert a more productive economy into a fairer community as well.”

Just as significantly, the growth and employment forecasts assume further interest rate cuts.

In the Budget, Treasury said that in arriving at its forecasts “interest rates are assumed to move broadly in line with market expectations at the time the forecasts were finalised”.

Budget preparations finished last month, when markets were aniticpating the official cash rate – which was cut to 3.75 per cent last week – could drop close to 3 per cent, implying that the Government expects more rate cuts to come.

The net effect, according to Treasury, should be sustained growth at close to the long-term average despite deep Government spending cuts and weakness in much of the economy.

“The impact of the Government’s fiscal consolidation, particularly in 2012-13, should be more than offset by growth in private demand,” the Budget said.

AR


Published: 09 May 2012