Article: Budget reveals massive slump

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Budget reveals massive slump

Budget reveals massive slump
Peter Martin
April 16, 2011

Wayne Swan will be forced to make savage cuts to his May budget after confidential Treasury figures showed a $13 billion fall in economic growth for this financial year.

The Treasurer will announce forecast growth of just 2.25 per cent, far lower than the 3.25 per cent forecast in the November budget update and well below the 2.5 per cent canvassed informally in budget meetings just weeks ago.

The Australian economy is worth $1.3 trillion a year, so a 1 per cent fall in growth amounts to a $13 billion hit to the Australian economy.

That weaker outlook will put further pressure on Mr Swan to find budget cuts with immediate effect to offset revenue losses that will be felt in 2011-12.

The deteriorating forecasts show Australia's economy was hit far worse by the January floods and cyclone and Japan's tsunami and nuclear disaster than previously believed.

An earlier Treasury briefing seen by The Saturday Age said the floods would wipe $6 billion off gross domestic product from lost coal production alone. Many mines were still unusable and it was uncertain when mine production would return to full capacity.

The Australian disasters are expected to wipe 0.5 percentage points from economic growth this financial year, possibly sending March quarter growth backwards.

''With already patchy growth in some sectors, the impact could lead to flat or even negative growth in the March quarter, although there is likely to be a rebound in the June quarter,'' the March minute reads.

The new assessment attributes a 0.25 per cent plunge in economic growth to Japan's earthquakes and tsunami.

In addition, Treasury has told Mr Swan the non-mining economy is weaker than foreseen.

Consumers are saving and paying off debt rather than spending as had been expected in the November budget update. Mr Swan has been told every area of retail spending is growing below its long-term trend.

The 105 US cent Australian dollar is also hurting both exporting and import-competing industries more deeply than anticipated in November, when a long-term exchange rate of 98.5 US cents was assumed.

Borrowing by business fell 1.7 per cent in the past year, harming both financial firms and the construction sector. Non-residential construction is languishing around 30 per cent below pre-crisis levels. Despite the grim outlook, the Gillard government intends to maintain and expand its primary infrastructure advisory body, Infrastructure Australia.

Funding for the body was due to run out in this budget round, but it is expected Infrastructure Australia will be given increased financial resources over the next four years. The government will also maintain the body's current chairman, Sir Rod Eddington.

Speaking in Washington, where he is attending international meetings, Mr Swan defended his determination to return the budget to surplus by 2012-13, saying he could do it ''without choking off the economic recovery''.

''The early years of the budget will bear the brunt of the natural disasters,'' he said.

''But these events have not knocked our economy off course.''

The downgraded forecasts relate to only the current financial year. Mr Swan has been told the 3.73 per cent growth forecast for 2011-12 remains on track and could even be revised up.

Budget forecasts are continually revised in the weeks leading up to budget night as new information becomes available.

The 2.25 per cent growth forecast for this financial year is firm, but the outlook for future years will continue to be revised over the next three weeks.

Meanwhile, growth is bringing problems for China's economy, with new data showing inflation accelerating to uncomfortably high levels in the March quarter.

China's annual inflation rate ballooned to 5.4 per cent in the March quarter, from 4.9 per cent in the previous three months, while economic growth eased only slightly to 9.7 per cent from 9.8 per cent previously.

With KATHARINE MURPHY, AAP