Budget needs surgery, says IMF DAVID CROWE AND ADAM CREIGHTON THE AUSTRALIAN FEBRUARY 13, 2014 THE Abbott government has gained a new weapon in its fight to cut spending, with the International Monetary Fund urging repairs to the federal budget to prepare the nation for future economic shocks. Warning of risks to Australian growth, the IMF backed the government’s stated plans to balance the budget and lift productivity but rang the alarm on the surge in housing prices. The influential global body called on Joe Hockey to slash spending or increase taxes in the May budget if the government was to have any hope of meeting its target of a budget surplus of about 1 per cent of GDP in 2023. “Achieving this looks difficult on current spending plans without a large increase in budget revenue or a cut in spending or a combination of both,” the IMF said in an influential assessment issued last night. The Treasurer challenged Labor to stop its objections to at least $20 billion in savings measures currently before parliament as he signalled more difficult cuts ahead in May. As some within the government worry about the political risks of a message about cutting “the age of entitlement” for families as well as companies, the Treasurer insisted there was no “ideological” agenda behind the cuts. “We have to take the hard yards, and that starts on our turf,” Mr Hockey told parliament. The Treasurer said the government had already made the difficult decision to cancel the Schoolkids Bonus — worth about $1bn a year — because it was unaffordable. “We said that not because there is any ideological satisfaction in it, but because we knew that it was unfair to burden our children with the debt of handouts to parents today,” he said. “Every dollar that goes out is borrowed from our children. The bottom line is: Labor does not care about that, but we do. We care about intergenerational debt.” The new report, known as an Article IV Consultation and released at IMF headquarters overnight, notes the dangers facing the economy but nonetheless upgrades the nation’s outlook. The report forecasts 6.1 per cent unemployment this year compared with the government’s official forecast of 6.25 per cent in the budget update in December. It also forecasts 2.6 per cent economic growth this year compared with a 2.5 per cent forecast in the midyear budget update and the same figure in an IMF report in November. Surging house prices and a slump in Chinese demand for Australian minerals are singled out in the new report as the biggest threats to the economy. Rapid projected growth in what the IMF calls “social” spending — health, disability, and age pension costs — meant the government would have to cut total spending by about $45bn a year in today’s money. “Reaching the government’s budget surplus target would thus require cutting spending by around 3 per cent of GDP, either by reducing net non-social spending or by putting in place policy measures to contain increases in social spending” it said, noting Australia’s vulnerability to developments overseas. The government’s latest budget update forecast a deficit of $47bn this financial year, falling to $33.9bn in 2014-15. Echoing the Reserve Bank’s fears, the IMF said mining investment would “drop sharply in the near term”, necessitating growth in the non-mining economy while export revenue grew. “A hard landing in China could reduce demand for Australia’s mineral exports, worsen the terms of trade, reduce household income and trigger a fall in house prices,” the IMF said, noting over half of Australia’s exports went to emerging Asia and almost two-thirds were iron ore and coal exports. The IMF said there was “a risk that rapid house prices growth could give rise to expectations-driven, self-reinforcing demand dynamics and price overshooting, and the authorities would need to be prepared to take preventive action”. It suggested the Reserve Bank would have to lift rates from record lows or 2.5 per cent sooner than expected. “Banks could be exposed to highly leveraged households and to rollover risks associated with offshore funding needs,” the Washington DC-based bureaucrats said, noting Australia’s household debt to disposable income ratio was among the highest in the world at near 150 per cent. The IMF economists said the Australian dollar, at about US89c at the time of its analysis, was between 5 and 10 per cent overvalued, and would present an obstacle to improved economic growth. Consumers might be sceptical of the need for further reform: Westpac’s closely watched confidence survey fell for the third month in a row in January to its lowest level since July. It has fallen 9.5 per cent since its high in September after the Coalition’s election to a point where pessimists almost exactly match the number of optimists. “Households seem to be sending a fairly clear message in this survey: why is fiscal policy about to be tightened and interest rates lifted when the labour market is so weak and housing affordability is being squeezed,” said Bill Evans, Westpac’s chief economist. Ian Davidoff, Australia’s alternate executive director at the IMF, in an accompanying statement to the Article IV report, said gross public debt would rise to 26 per cent of GDP by 2023 without policy change. “The medium-term fiscal outlook has worsened, in part due to changes in demand-driven programs focused on education and disability services. The Australian economy will need to become more efficient in order to sustain recent rates of increase in national income,” he wrote, calling for a new round of productivity-boosting micro-economic reform.
Posted on: Wed, 12 Feb 2014 22:46:47 +0000
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