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Update_Shell_Economics 09.indd 1 27/6/09 10:52:21 AM
VOL. 19 NO. 4
May 2012
Budget returns to surplus while spreading the
benets of the mining boom
With the mining boom continuing to drive economic growth
in Australia, the Government has committed to a policy of
fiscal consolidation by planning a long-awaited budget surplus
for the 2012-13 financial year. The Gillard Governments
second budget forecasts a small budget surplus equal to $1.5
billion in 2012-13, an enormous $45.9 billion turnaround
from a deficit of -$44.4 billion in 2011-12. The budget stance
of the 2012-13 Federal Budget is contractionary, with the
Government planning to make $33.6 billion in savings over
five years through large spending cuts and revenue increases.
However, even with growth expected to return to trend in
coming years, taxation revenue has still fallen below previous
forecasts. This reflects structural changes in the economy
(particularly the mining investment boom) and the long-
term impact of the global financial crisis on the revenue base.
The Government has also announced significant measures
to redistribute income gains from the resources boom to
households and small businesses. The Budget includes a
number of significant long-term policies that aim to boost
the economys productive capacity and address pressing social
needs. This issue of the Economics Update analyses the key
features of the 2012-13 Federal Budget and its impacts on the
Australian economy.
The Policy Mix
The Government is returning the budget to surplus
in 2012-13, on time and as promised, with surpluses
growing over the forward estimates. This Budget
delivers on the Governments fiscal strategy while
also spreading the benefits of the mining boom
to help families on low and middle incomes and
small business. A return to surplus, ahead of any
major advanced economy, sends a strong message
to international investors on the Governments
commitment to fiscal discipline, and provides a buffer
in uncertain global economic times The Australian
economy continues to be affected by the dramatic
structural changes underway in the global economy,
as the weight of economic activity moves towards
Asia. Resource prices and the Australian dollar are
expected to remain elevated by historical standards.
However, the high dollar, cautious consumer and
ongoing global uncertainty are expected to weigh
heavily on some parts of the economy outside of the
resources-related sectors.
2012-13 Commonwealth Budget Paper 1, Statement 1
Fiscal policy has played a major role in the economic policy
mix in recent years. The slowdown in domestic economic
growth in 2009 due to the global financial crisis was partly
offset by countercyclical fiscal policy. The use of expansionary
fiscal policy in 2008-09 and 2009-10 provided significant
macroeconomic stimulus to the Australian economy. The
combination of discretionary stimulus spending and a cyclical
drop-off in taxation revenue saw large fiscal deficits, equal
to -$29.7 billion (-2.4 per cent of GDP) in 2008-09, -$52.9
billion (-4.1 per cent of GDP) in 2009-10. This also saw a
steady rise in net public debt. At the same time, monetary
policy moved towards an expansionary stance. The renewed
focus on fiscal policy came after over a decade in which fiscal
policy had played a support role to monetary policy, which
was the primary macroeconomic management tool.
As the economy recovered, the focus of fiscal policy shifted
from fiscal expansion to fiscal consolidation, with the
Government committing to return the budget to surplus in
2012-13. The Governments medium-term fiscal strategy is
to achieve budget surpluses, on average, over the economic
cycle. After running large budget deficits during the economic
downturn, with private demand recovering the Government
has attempted to shift the budget back to surplus in order
to repay public debt. To do so, the Government has relied
on automatic stabilisers to improve the cyclical component of
the budget together with limits on the growth in discretionary
spending. The Government has committed to a cap on growth
in real government spending equal to 2 per cent per
year, until the budget returns to a surplus
of 1 per cent of GDP.
2 Vol. 19 No. 4 | Economics Update 2012
However, the task of
reducing the budget deficit
has been made more
difficult by weaker than
expected income taxation.
This saw the fiscal deficits
announced for 2010-11
and 2011-12 deteriorate
below initial forecasts. This
partly reflects a weaker
than expected recovery in
economic growth, including the temporary fall in production
due to the impact of the natural disasters that affected
Australia over late 2010 and early 2011. More importantly,
the deterioration in taxation revenue reflects the high level of
investment in the mining sector (which means that companies
can claim large tax-deductible depreciation charges), together
with weaker growth and lower profits in the non-mining
sectors of the economy. Nevertheless, the Government
expects an acceleration in growth in coming years to boost
taxation receipts and repair the budget balance.
The 2012-13 Budget also demonstrates the longer-term role of
governments in implementing structural reforms. The Budget
includes a number of reforms that aim to target resource
allocation in the economy. Chief among these is the Clean
Energy Future Package, which includes a tax of $23 per tonne
of carbon dioxide from 1 July 2012. The 2012-13 Budget
also includes key policies to reform disability care, aged care
and dental health. There are also measures to boost labour
force skills, encourage workforce participation and increase
Australias infrastructure capacity. The Government argues
that these measures are necessary to boost the economys
productive capacity in order to take full advantage of the
continuing strength of the global commodities boom and to
manage the challenges of Australias multispeed economy.
1. Fiscal tightening and return to
budget surplus
The main objective of the 2012-13 Budget is to return
the budget to surplus through fiscal consolidation. The
Government will tighten fiscal policy as economic growth
recovers in order to shift the budget from a deficit of -$44.4
billion in 2011-12 to a small surplus of $1.5 billion in 2012-13
(although in effect this is basically a balanced budget since
the surplus constitutes a tiny fraction of GDP). This indicates
a contractionary fiscal stance. The ratio of government
spending to GDP will be cut from 25.1 per cent in 2011-12
to 23.5 per cent in 2012-13, the biggest fall in government
spending as a share of GDP since the late 1980s. Planned
fiscal tightening will see net public debt peak at 9.6 per cent
of GDP in 2011-12 higher than previous forecasts but
around one-tenth of the public debt burdens in other major
advanced economies.
The Government argues that a return to budget surplus
is important for three reasons. First, it sustains investor
confidence in the strength of Australias public finances
by demonstrating the Governments commitment to fiscal
discipline. Second, a fiscal surplus provides a buffer against
any future downturn in the domestic economy. This is seen
as particularly important in the context of the European
sovereign debt crisis, potentially allowing scope for additional
stimulus measures if the outlook for global growth deteriorates
further. Third, a decrease in net government expenditure
may give the Reserve Bank of Australia (RBA) more room to
ease monetary policy, which would be especially important
in stimulating the non-mining sectors of the economy. It is
argued that a contractionary Budget should ease inflationary
pressures while reducing the pressure that government
borrowing has on market interest rates (that is, the reverse
crowding out effect).
In order to return the Budget to surplus, the Government has
planned $33.6 billion in savings in the five years from 2011-12
to 2015-16, in the form of reductions in discretionary spending
and increases in revenue. At the same time, improvements
in the cyclical component of the budget will be driven by a
Actual
2010-11
Estimates
2011-12 2012-13 2013-14
Projections
2014-15 2015-16
Underlying cash balance ($bn) -47.7 -44.4 1.5 2.0 5.3 7.5
Per cent of GDP -3.4 -3.0 0.1 0.2 0.3 0.4
Fiscal balance ($bn) -51.5 -42.0 2.5 2.6 7.0 9.5
Per cent of GDP -3.7 -2.8 0.2 0.2 0.4 0.5
Source: 2012-13 Commonwealth Budget Paper 1, Statement 1
Goals of Fiscal Policy in 2012-13
Fiscal consolidation: forecast budget surplus of
$1.5 billion (0.1 per cent of GDP) in 2012-13, up
from a deficit of -$44.4 billion (-3.0 per cent of
GDP) in 2011-12.
Fiscal stance is contractionary, due to both
discretionary and cyclical factors.
Budget savings of $33.6 billion over 2011-12 to
2015-16. Real government spending is forecast to
fall by 4.3 per cent in 2012-13.
Revenue has been slow to recover, with taxation
receipts equal to 21.0 per cent of GDP in 2011-
12, down from 23.8 per cent of GDP in 2007-08.
Emphasis on redistributing income from the mining
boom through assistance to low and middle
income households, and small businesses.
Priority spending areas: National Disability
Insurance Scheme, aged care reforms, workforce
skills, infrastructure and introduction of the
carbon tax.
Main features
-8
-7
-6
-5
-4
-3
-2
-1
0
Cyclical factors Structural factors
2011-12 2010-11
$bn
Source: 2011-12 Commonwealth Budget Paper 1, Statement 3
Economics Update 2012 | Vol. 19 No. 4 3
forecasted recovery in the economys growth rate to around
trend levels of 3.25 per cent in 2012-13 and 3 per cent in 2013-
14. This will be driven largely by strong growth in the resources
sector, especially mining investment. However, the recovery in
income taxation receipts is expected to be slower, reflecting
the impact of structural change on the revenue base and the
lingering impacts of the financial crisis. Importantly, the
revenue forecasts are highly exposed to changes in the global
economy, and are vulnerable to fluctuations in global growth.
2. Support for households and
businesses
The Budget contains a set of policies that aim to provide
substantial assistance to low and middle income households
and small businesses by redistributing the windfall gains of
the resources boom to the non-mining sectors of the economy.
While mining and related sectors have experienced record
high profitability and income growth, economic activity in
other areas of the economy such as manufacturing, tourism
and retail has been more subdued due to the high Australian
dollar and low levels of consumer confidence. The Spreading the
Benefits of the Boom package aims to channel the proceeds of the
Minerals Resource Rent Tax (MRRT) into $3.6 billion worth
of handouts to households and businesses, and includes:
$1.8 billion to increase the rate of Family Tax Benefit A (a
government support payment made to 1.5 million families),
which will increase the maximum payment by $600 per year
for families with two or more children.
$1.1 billion to create a new Supplementary Allowance of
up to $210 a year as an extra income support payment for
those on government assistance including the unemployed,
students and parents with young children.
$714 million to introduce loss carry-back for businesses,
which allows businesses to deduct losses of up to $1 million
from taxable income in previous years, allowing an extra
tax refund of up to $300,000 per year. In 2012-13 they will
be able to carry back losses for one year, increasing to two
years in 2013-14.
In addition, households will also receive support through $2.1
billion for a new Schoolkids Bonus (replacing the Education
Tax Refund) to be paid to families to assist with their childrens
primary and secondary education costs. The Government will
also allow small businesses to claim immediate tax deductions
on eligible business assets costing less than $6,500 and to claim
up to $5,000 of depreciation on motor vehicles. While the
Government originally planned to cut the company tax rate
from 30 per cent to 29 per cent for small businesses in 2012-
13 and for large businesses in 2013-14, it dropped these plans
after being unable to receive sufficient support in Parliament.
The Budget also includes significant compensation for
predicted price rises caused by the implementation of the
carbon tax from 1 July 2012. Treasury estimates that the carbon
tax will result in a one-off 0.7 per cent increase in consumer
prices in 2012-13. The Budget includes a tripling in the tax-free
threshold from $6,000 to $18,200 in 2012-13 and to $19,400
in 2015-16, as well as $6.3 billion of increases in government
income support payments.
3. Boost Australias productive capacity
The 2012-13 Budget also aims to boost the economys long-term
productive capacity by improving workforce skills, productivity
and participation. While this has received less emphasis in the
2012-13 Budget than in previous budgets, the Government is
continuing with the implementation of labour market programs
announced in the 2011-12 Budget under the $3 billion Building
Australias Future Workforce package. This includes measures to
reform the vocational education and training sector, such as
the National Workforce Development Fund (which will fund over
50,000 training places and support 12,000 apprentices) and a
$1.75 billion National Partnership Agreement on Skills Reform
with the States and Territories. Government policies also aim to
reduce the barriers to workforce participation for workers with
children, evidenced by investing an additional $225 million for
Jobs, Education and Training Child Care Fee Assistance, which will
reduce child care costs for income support recipients wanting
to go into work, study or training. There are also measures
to boost old-age participation in the labour force, including a
$1,000 payment to companies for each worker they hire over
50, as well as employment programs to assist mature job seekers
into work.
The Budget continues the Governments focus on boosting
infrastructure capacity following the implementation of the
$36 billion Nation Building Program announced in the 2008-09
Budget. The program provides significant investment in road,
rail and port infrastructure over six years aimed at improving
Australias infrastructure and helping to reduce capacity
constraints that have restrained the growth in Australias export
volumes. The Government will also invest $6 billion from the
Regional Infrastructure Fund to address urgent infrastructure
needs in Australias regional areas. However, in 2012-13
infrastructure has received less focus than previous budgets.
There are not a large number of new measures in this budget,
but amongst them are $3.6 billion to duplicate the Pacific
Highway (conditional on matching state funding) and funds
to develop a freight terminal at Moorebank in South Western
Sydney. In addition, the Government will continue with the
rollout of the National Broadband Network, one of the largest
areas of infrastructure spending in recent years.
4. Increased spending on priority areas
The Government has focused discretionary spending on
a range of priority areas. Many of these items are long-term
reforms that aim to address important social and community
needs. They include:
Tax rates from 2012-13 Tax rates in 2011-12
Taxable
income ($)
Tax rate
(%)
Taxable
income ($)
Tax
rate (%)
0 18,200 0 0 6,000 0
18,201 37,000 19 6,001 37,000 15
37,001 80,000 32.5 37,001 80,000 30
80,001 180,000 37 80,001 180,000 37
180,001 + 45 180,001 + 45
Changes to income tax rates
4 Vol. 19 No. 4 | Economics Update 2012
The 2012-13 financial year will see the budget return to a small
surplus of $1.5 billion, or 0.1 per cent of GDP. This represents
a massive turnaround from 2011-12 equal to 3.1 per cent of
GDP. The forecast return to a budget surplus is a reflection of
two factors: the countercyclical effect of automatic stabilisers
as economic growth has recovered, and numerous savings
measures employed to limit growth in discretionary spending.
Overall, revenue will increase from $336.4 billion in 2011-12
to $376.1 billion in 2012-13, whilst government expenditure
will rise moderately from $373.7 billion in 2011-12 to $376.3
billion in 2012-13.
Cyclical Factors
As economic growth has returned following the global financial
crisis, the cyclical components of the budget the automatic
stabilisers have worked to gradually increase government
revenue and moderate government
expenditure. Stronger economic growth
leads to rising incomes and company
profits, which in turn increases personal
income tax revenue and company tax
revenue. Stronger economic growth also
leads to falling cyclical unemployment,
reducing government expenditure on
social welfare such as unemployment
benefits.
In overall terms taxation
revenue is expected to
increase due to cyclical
factors. However, income
taxation has not rebounded
as quickly as originally
forecasted. Revenue will
be a total of $28 billion
lower over the next four
A National Disability Insurance Scheme (NDIS) The
Budget has committed $1 billion to implementing the first
stage of the NDIS, which will overhaul the current disability
care and support system by funding life-time care and
support for people who suffer significant and permanent
disability. All Australians will effectively be insured against
disability.
Aged care reforms The Government has announced
$3.2 billion in reforms to Australias aged care system that
includes almost doubling the number of home-based care
services, introducing new means testing arrangements, and
improving pay and conditions for aged care workers.
Dental care The Government will invest $515 million
over four years to improve dental health services by reducing
dental waiting lists and helping dentists relocate to rural
and remote areas.
The Budget also includes the implementation of the
Governments Clean Energy Future Plan. The most important
part of the policy is the introduction of a carbon pricing
mechanism that aims to internalise the costs of carbon
dioxide emissions and reduce Australias greenhouse gas
emissions to 5 per cent of 2000 levels by 2020. The package
also includes funding for a number of initiatives that aim to
reduce Australias reliance on renewable energy including the
Clean Energy Finance Corporation and the Australian Renewable
Energy Agency.
Actual
2010-11
Estimates
2011-12 2012-13 2013-14
Projections
2014-15 2015-16
Revenue ($bn) 309.9 336.4 376.1 402.2 424.8 449.6
Per cent of GDP 22.1 22.8 24.2 24.6 24.7 24.8
Expenditure ($bn) 356.1 373.7 376.3 398.5 416.4 439.0
Per cent of GDP 25.4 25.3 24.4 24.4 24.2 24.2
Source: 2012-13 Commonwealth Budget Paper 1, Statement 3
Actual
2010-11
Estimates
2011-12 2012-13 2013-14
Projections
2014-15 2015-16
Income tax revenue ($bn) 204.9 232.0 257.6 278.7 296.5 316.0
Personal income tax revenue ($bn) 136.8 151.2 163.1 178.8 191.4 203.9
Company tax revenue ($bn) 57.3 68.0 75.0 77.9 81.9 85.9
MRRT ($bn) - - 3.0 3.5 3.2 3.7
Capital gains tax ($bn) 6.4 6.7 10.2 12.9 14.7 16.2
Source: 2012-13 Commonwealth Budget Paper 1, Statement 5
The Budget Outcome
Two new taxes in 2012
From 1 July 2012 the Government will implement
two new taxes: the Minerals Resource Rent Tax (the
MRRT, or the mining tax) and the Clean Energy Future
Package carbon pricing mechanism (the carbon tax).
The MRRT will apply a tax of 30 per cent on the
super-profits of all iron ore and coal projects with
annual profits above $75 million. The tax will be paid
by around 320 companies. The aim of the MRRT is to
capture extra taxation revenue from Australias non-
renewable resource exports when commodity prices
are at elevated levels. The MRRT is expected to raise
$3.0 billion in 2012-13 and $3.5 billion in 2013-14,
which is lower than previous forecasts.
Under the carbon tax, carbon dioxide emissions will
be subject to a tax of $23 per tonne, applying to the
500 largest polluters in Australia. The tax is forecast
to raise $4.0 billion in 2012-13 and $24.7 billion in
total over the next four years. In July 2015 the tax will
be replaced with a cap and trade emissions trading
scheme, where the market will determine the price
of carbon. The Government is providing significant
compensation to both industry and households.
Economics Update 2012 | Vol. 19 No. 4 5
years, compared with forecasts made in November. This reflects
weaker growth and the impact of structural change on the
revenue base. Even so, individual income taxation receipts are
forecast to grow by 8 per cent from $151.2 billion in 2011-12
to $163.1 billion in 2012-13. Company tax receipts are forecast
to grow by 10 per cent from $68.0 billion in 2011-12 to $75.0
billion in 2012-13. Part of the reason for the expected increases
in company taxes are rising profits in the mining sector as a
result of the global resources boom. As asset prices recover
capital gains tax is forecast to growth strongly in 2012-13,
while the new Minerals Resource Rent tax (MRRT) will deliver
modest revenues from record company profits from iron ore
and coal projects.
On the expenditure side, the 2012-13 Budget anticipates only a
moderate increase in social security and welfare spending. This
reflects stronger economic growth since the global financial
crisis and falling unemployment. Social security and welfare
spending is forecast to grow by just 4 per cent from $126.9
billion in 2011-12 to $131.7 billion in 2012-13. However,
assistance to the unemployed and the sick is expected to
expand by $1.3 billion, or 18 per cent, over 2012-13 reflecting
the payment of a Supplementary Allowance to recipients of
Newstart (the unemployment benefit). The principal driver
of growth in welfare payments is income support for the aged.
This is because the number of people expected to receive the
age pension increases each year in line with Australias aging
population. It is also because the age pension is linked to a fixed
proportion of male total average weekly earnings. As incomes
continue to rise, assistance to the aged is expected to increase
by $2.5 billion over 2012-13.
Discretionary Changes
The Government has also announced a range of discretionary
policy changes to support the contractionary impact of the
automatic stabilisers in achieving fiscal consolidation. In real
terms, government spending is forecast to fall by 4.3 per cent
in 2012-13 before growing by 3.7 per cent in 2013-14. Between
2011-12 and 2015-16 real spending growth will average 1.8 per
cent, which is consistent with the Governments strategy of
keeping real annual spending growth within 2 per cent.
%
Source: 2012-13 Commonwealth Budget, Paper 1, Statement 10
Forecasts
-6
-4
-2
0
2
4
6
8
10
12
14
2
0
1
5
-
1
6
*
2
0
1
4
-
1
5
*
2
0
1
3
-
1
4
*
2
0
1
2
-
1
3
*
2
0
1
1
-
1
2
*
2
0
1
0
-
1
1
2
0
0
9
-
1
0
2
0
0
8
-
0
9
2
0
0
7
-
0
8
2
0
0
6
-
0
7
2
0
0
5
-
0
6
2
0
0
4
-
0
5
2
0
0
3
-
0
4
2
0
0
2
-
0
3
2
0
0
1
-
0
2
2
0
0
0
-
0
1
Change in real government spending (%)
The Government expects to make $33.6 billion in savings over
five years. The majority of these savings have been achieved
through spending reductions. Some of the major savings items
over the next four years include:
Not proceeding with the planned company tax cut from 30
per cent to 29 per cent ($4.7 billion)
Tax revenue still down since GFC
In the years following the global financial crisis there
has been a sharp fall in taxation revenue as a share
of GDP. The tax-to-GDP ratio fell from 23.8 per cent
in 2007-08 to a low of 20.1 per cent in 2010-11, and
is forecast to only recover slowly to 22.9 per cent
by 2015-16. Since the global financial crisis this has
represented a $140 billion shortfall in lost taxation
revenue. These trends can be explained by the reversal
of cyclical factors from the pre-crisis period as well as
structural changes influencing the revenue base:
Capital gains tax has been low since the global
financial crisis, reflecting a sharp downturn in asset
prices (such as shares).
Consumer caution has led to lower household
consumption and lower indirect tax receipts (such
as from the GST), as well as keeping company
profits low.
Weaknesses in the labour market have seen slower
growth in personal income taxation revenue.
A structural shift in the composition of growth
towards mining, transport and utilities and away
from manufacturing, retail and finance has reduced
growth in company tax revenue. While mining profits
have expanded to record levels, this has not been
met by a proportionate growth in mining taxation.
This is because of the high levels of investment in
the mining sector, which allows companies to claim
large depreciation expenses on mining assets,
which are tax deductable.
The record high Australian dollar has also been
reducing company tax receipts in non-mining export
and import-competing sectors.
% of GDP
Source: 2012-13 Commonwealth Budget, Paper 1, Statement 10
Forecasts
2
0
1
5
-
1
6
*
2
0
1
4
-
1
5
*
2
0
1
3
-
1
4
*
2
0
1
2
-
1
3
*
2
0
1
1
-
1
2
*
2
0
1
0
-
1
1
2
0
0
9
-
1
0
2
0
0
8
-
0
9
2
0
0
7
-
0
8
2
0
0
6
-
0
7
2
0
0
5
-
0
6
2
0
0
4
-
0
5
2
0
0
3
-
0
4
2
0
0
2
-
0
3
2
0
0
1
-
0
2
2
0
0
0
-
0
1
18
19
20
21
22
23
24
25
Tax receipts as a percentage of GDP
6 Vol. 19 No. 4 | Economics Update 2012
Impact on economic growth
SHORT TO MEDIUM TERM
The 2012-13 Budget is likely to have a contractionary impact
on economic activity. The Government plans to tighten fiscal
policy by an enormous $45.9 billion between 2011-12 and 2012-
13. Real government spending is forecast to fall by 4.3 per cent
in 2012-13 the largest since records began in 1970-71. Public
final demand (a measure of the impact of the public sector on
aggregate demand) is expected to decrease by 0.5 per cent in
2012-13 and remain flat in 2013-14. This is a necessary effect
of discretionary savings in the budget, as well as the fiscal drag
of automatic stabilisers. Fiscal drag refers to the contractionary
impact of progressive income taxation, which means that as
taxpayers earn higher incomes, they move into higher marginal
income taxation brackets. Given the large turnaround in the
budget position, it would appear that the fiscal consolidation
should have an extremely contractionary impact on economic
growth. With growth still weak in non-mining sectors of the
economy there may be a risk that overly tight fiscal policy could
push Australia back into a downturn.
However, the forecast $45.9 billion turnaround in the budget
balance from 2011-12 to 2012-13 probably overstates the true
degree of fiscal tightening. Part of the reason for this is that the
Government has used various accounting techniques to shift
expenses out of 2012-13 and into 2011-12 or future years. For
instance, the Government has brought forward $1.1 billion
in grants for local councils from 2012-13 to 2011-12. Further,
many of the savings are being made in areas that do not have
a very significant impact on aggregate demand such as cuts
to the Defence budget, reduced tax concessions for high
income earners (who typically have a low marginal propensity
to consume) and delaying increases in the foreign aid budget.
In addition, many of the cuts to expenditure are partially being
Deferring, or not proceeding with other proposed tax
cuts, including the proposed standard tax deduction on
work-related expenses and tax discount on interest income
($4.9 billion)
Cutting Defence spending by improving efficiency and
deferring acquisitions ($5.5 billion)
Deferring the proposed increase in official development
assistance foreign aid ($2.9 billion)
Tightening eligibility requirements for various income
support payments, such as the Parenting Payment, Family
Tax Benefit Part A and the Aged Care Funding Instrument
($2.4 billion)
Increase in the efficiency dividend (that is, budget cuts)
for public sector departments ($1.5 billion)
The Governments spending measures will also be supported
by two new sources of taxation revenue in 2012:
The carbon tax, commencing in July 2012, is forecast to
provide the Government with $24.7 billion in tax receipts
in the four years to 2015-16
The Minerals Resource Rent Tax, also commencing in July
2012, is forecast to provide $13.4 billion in tax receipts in
the four years to 2015-16
However, despite the overall fall in public expenditure, the
Government has also introduced some new discretionary
spending measures over the next four years, including:
Increasing social security and welfare payments, such as
Family Tax Benefit Part A; a new Supplementary Allowance
income support recipients; and the new Schoolkids Bonus
($5 billion)
Improving the aged care system ($3.7 billion)
Establishing a National Disability Insurance Scheme
($1 billion)
Establishing the National Partnership Agreement on Skills
Reform, designed to address skills shortages ($1.75 billion)
Loss carry back for businesses ($714 million)
Increasing the Jobs, Education and Training Child Care
Fee Assistance program ($225 million)
Improving dental health services ($515 million)
Net public debt
Australias government finances remain amongst the
strongest in the Organisation for Economic Cooperation
and Development (OECD), with the first forecast budget
surplus amongst all advanced economies. Net government
debt is expected to peak at 9.6 per cent of GDP in 2011-12
(equivalent to $142.5 billion), and then decline over the next
five years. This is higher than previous forecasts, and will see
the government make around $7 billion in interest repayments
each financial year. The Government will also increase the limit
on Australian government debt on issue (effectively increasing
Australias debt ceiling) from $250 billion to $300 billion.
By contrast, in the major advanced economies net government
debt is expected to reach an average peak of around 93 per cent
of GDP in 2016 and 2017, around ten times higher than the
expected peak in the Australian Governments net debt.
Impacts of Fiscal Policy
% of GDP
Source: 2012-13 Commonwealth Budget, Paper 1, Statement 10
Forecasts
-4
-2
0
2
4
6
8
10
2
0
1
5
-
1
6
*
2
0
1
4
-
1
5
*
2
0
1
3
-
1
4
*
2
0
1
2
-
1
3
*
2
0
1
1
-
1
2
*
2
0
1
0
-
1
1
2
0
0
9
-
1
0
2
0
0
8
-
0
9
2
0
0
7
-
0
8
2
0
0
6
-
0
7
2
0
0
5
-
0
6
2
0
0
4
-
0
5
2
0
0
3
-
0
4
2
0
0
2
-
0
3
2
0
0
1
-
0
2
2
0
0
0
-
0
1
Net public debt (% of GDP)
Economics Update 2012 | Vol. 19 No. 4 7
offset by large payments to households elsewhere in the budget
as compensation for the carbon tax and to redistribute the
benefits of the mining boom.
The economy is forecast to grow by 3.25 per cent in 2012-13 and
3 per cent in 2013-14, close to the trend level. Unemployment
is expected to rise slightly to 5.5 per cent in 2012-13 and 2013-
14. Economic growth will be driven by massive investment
spending and export revenue from the mining sector. Even
though the terms of trade have peaked, economic activity is
expected to remain uneven across Australias multispeed
economy. Pressures from ongoing global uncertainty, the high
Australian dollar, consumer caution and changes in household
expenditure patterns are all expected to weaken non-mining
sectors, particularly retail, manufacturing and tourism.
Overall the Budget is likely to have a contractionary impact
on household consumption over 2012-13. Amongst low and
middle-income households the Budget provides some measures
to increase disposable income, including increasing Family
Tax Benefit payments, providing additional grants such as the
Schoolkids Bonus and increasing the tax-free threshold. Given
that consumer confidence remains low and the household
savings ratio remains high, it is unlikely that these measures
will lead to any sustained increase in household
consumption. However, the Commonwealth Bank
has noted that bringing forward some spending
into 2011-12 especially the Governments carbon
tax assistance payments together with the 0.5
percentage point RBA cash rate cut in May, may
generate an increase in retail sales in coming
months. Cuts to public sector budgets are also
likely to result in around 4,000 public service job
losses, which will dampen consumption spending.
Household consumption is expected to grow
moderately over 2012-13 by 3.25 per cent and by 3
per cent 2013-14, adding 1.75 percentage points to
growth in both years.
Business investment is expected to grow strongly,
increasing by 12.5 per cent in 2012-13 and
contributing 3.75 percentage points to GDP growth.
Treasury forecasts that business investment will
reach a record share of GDP in 2013-14, driven
by the resources sector. Several measures in the
Household
consumption
Dwelling
investment
Business
investment
Public
expenditure
Exports
Imports
GDP
Imports
2011-12 (estimate) 2012-13 (forecast) 2013-14 (forecast)
Percentage points
Source: 2012-13 Commonwealth Budget Paper 1, Statement 2
-3
-2
-1
0
1
2
3
4
-3
-2
-1
0
1
2
3
4
Contributions to GDP growth (percentage points)
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8 Vol. 19 No. 4 | Economics Update 2012
Budget may encourage businesses investment in the non-
mining sectors of the economy. By providing small businesses
with immediate tax deductions for assets costing less than
$6,500 and by accelerating depreciation allowances on motor
vehicles, businesses will be more likely to increase investment
in new machinery and equipment. Further, the measures that
allow businesses to carry-back losses will free up cash flow for
capital expenditure. On the other hand, the introduction of
the Minerals Resource Rent Tax (MRRT) from 1 July 2012
may reduce investment in the minerals and energy sector by
reducing after-tax profits. Since the MRRT is very complex
there is some uncertainty about the impact it is likely to have.
However, at this stage it does not appear that it will impose a
major additional tax burden on mining companies, and it is
unlikely to significantly affect investment decisions, given that
commodity prices are at near-record highs.
The contractionary stance of the budget is likely to put
downward pressure on demand-pull inflation, thereby allowing
room for looser monetary policy. Treasury forecasts underlying
inflation to remain within the RBAs 2-3 per cent target band
over 2012-13. This reflects the decrease in public demand
and reduction in real government payments. However, the
introduction of the carbon tax on 1 July 2012 is expected to see
a one-off 0.7 per cent increase in headline inflation in 2012-
13. While the Government argues that returning the budget
to surplus will reduce the pressure on domestic interest rates,
public borrowing is just one influence on the level of interest
rates in Australia given our level of integration with global
financial markets.
The main risks to the economic growth outlook are related
to the strength of the global economy. Global output is
forecast to grow by 3.5 per cent and 4 per cent in 2012 and
2013 respectively. Downside risks to the global recovery
include ongoing sovereign debt problems in Europe, high
unemployment in the United States and Europe, fiscal
sustainability issues amongst the major advanced economies,
a moderation in growth in emerging economies and the risk
of rising oil prices. While growth in the US has begun to
recover, both the United Kingdom and the eurozone are back
in recession. Were the global economy to experience a double-
dip recession, this would nullify the underlying forecasts upon
which the Budget is based. Treasury has estimated that an
additional 4 per cent fall in the forecast terms of trade would
reduce revenue by $3.3 billion in 2012-13 and $7.0 billion in
2013-14, wiping out the planned surplus. This demonstrates
that, ultimately, Australias fiscal position is heavily dependent
upon the continued strength of the global economy.
LONG TERM
The 2012-13 Budget continues with the implementation of
measures to boost the economys long-term productive capacity
that were announced in previous budgets. Policies to improve
workforce skills through the Building Australias Future Workforce
package will boost productivity levels throughout the economy.
These measures will also alleviate skills shortages, reducing
future pressure on cost-push inflation and easing the constraints
on Australias export capacity. In addition, measures to remove
barriers to workforce participation will encourage people into
the labour market, boosting labour supply. Reforms to increase
skills and participation also smooth the process of structural
change in the economy by ensuring that prospective workers
have the necessary skills to find employment in the growing
sectors of the economy. Moreover, significant investment
in infrastructure in previous budgets, including the Nation
Building Program and the National Broadband Network, will
reduce production costs for businesses and boost Australias
international competitiveness.
The Budget also aims to prepare the Australian economy for
long-term economic, social and environmental challenges.
Firstly, the Clean Energy Future Package contains significant
measures to reduce Australias emissions of greenhouse
gases that cause climate change. The implementation of a
carbon pricing mechanism, together with programs to boost
investment in renewable energy, is designed to improve
Australias environmental sustainability. Secondly, the aged
care reforms aim to manage the future challenge of population
ageing by improving the quality of aged care and reducing the
future fiscal burden on government health and social welfare
spending. Thirdly, the National Disability Insurance Scheme
will address an area of pressing social need and provide a more
efficient system for funding long-term care for people with
disabilities.
Impact on national savings and external
stability
The policy of fiscal consolidation will have a positive impact
on external stability. This is because a budget surplus is a form
of public saving that adds to the total level of national savings,
reducing Australias savings-investment gap and decreasing
our reliance on overseas capital inflow. By contrast, a budget
deficit is said to worsen the current account deficit. The sale of
government bonds to finance the budget deficit may push up
interest rates in domestic financial markets and force private
investors to borrow from foreign financial markets instead. This
leads to an increase in foreign debt and interest repayments,
recorded as primary income outflows, worsening the current
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Economics Update 2012 | Vol. 19 No. 4 9
account deficit. Further, because Australia has open capital
markets, Australian government bonds can be purchased
by overseas investors, increasing the governments share of
net foreign debt. By running a budget surplus and gradually
repaying public debt the government will mitigate these effects
and reduce Australias reliance on external borrowing.
In previous budgets, the Government has announced measures
to increase private savings by households in order to reduce
Australias reliance on foreign capital inflows. This has included
plans to increase the compulsory superannuation guarantee
from 9 per cent to 12 per cent by 2019. However, this Budget
includes no major policies designed to increase private savings,
and actually includes several policies that may reduce private
savings. The Government dropped plans in last years budget
to grant a 50 per cent tax deduction on interest income earned
on savings; it reduced tax concessions for superannuation
contributions for those earning over $300,000; and it delayed
until 2014-15 plans to introduce a higher cap on concessional
superannuation contributions (which receive a more
favourable tax treatment) for those with less than $500,000
in superannuation. Given that the household savings ratio is
already close to a 25 year high, and given that public saving is
planned to increase in coming years, boosting private savings is
not currently a priority for the Government.
The Government has also argued that a credible fiscal
consolidation strategy is fundamental to ensuring that
Australias foreign liabilities are sustainable. The Government
believes that maintaining fiscal sustainability is particularly
important at a time of ongoing global economic uncertainty,
and when budget deficits and high public debt levels have led
to significant financial volatility, especially in Europe. Forecast
budget surpluses allow the Australian Government to begin to
repay public debt and repair its balance sheet, thereby limiting
the exposure of the Australian Government to external
financing risks.
Impact on the distribution of income
Fiscal policy is the only government economic policy that directly
targets the distribution of income and wealth. Overall the
discretionary measures in the 2012-13 are expected to improve
the distribution of income in Australia. The Budget is explicitly
redistributive, channelling the benefits received by the resources
sector and high income earners towards low and middle income
households. Some of the relevant policies include:
The increase in Family Tax Benefit A, the Supplement
Allowance and the Schoolkids Bonus will increase
disposable income amongst low and middle income
households. At the same time however, around 100,000
single parents will be transferred off parenting support
payments to the Newstart Allowance (the unemployment
benefit) once their youngest child turns eight, resulting in a
welfare cut of up to $60 per week.
Personal income tax cuts and increases in income support
payments as compensation for the introduction of the carbon
tax are targeted at lower income households (however, the
carbon tax itself is likely to worsen the distribution of
income by increasing the price of goods and services that
are more emissions-intensive).
The National Disability Insurance Scheme will reduce the
out-of-pocket expense of receiving care for people with a
disability.
Increasing the superannuation contribution tax from 15
per cent to 30 per cent for people on high incomes (above
$300,000) will improve the distribution of income
Cutting the executive living-away-from-home allowance and
reducing tax breaks for golden handshakes will reduce the
disposable income of high-income households.
Conclusion
The 2012-13 Budget implements the Governments fiscal
consolidation strategy by returning the budget to surplus
as economic growth recovers. By allowing cyclical factors
to improve the budget balance, making substantial savings
in discretionary spending and implementing new revenue
measures, the 2012-13 Budget will have a contractionary
impact on the economy. The Budget also attempts to manage
the challenges of multispeed growth by redistributing some
of the windfall gains of the resources boom to the non-
mining sectors in the economy. It also includes a number of
measures to address long-term issues such as the economic
and environmental challenges of climate change, the future
fiscal burden of population ageing and the social challenge of
improving care for people with disabilities. In the short term,
risks around the budget outcome are related to the continued
strength of Australias terms of trade, global commodity prices
and the strength of the international business cycle. To this
extent, the budget revenue forecasts are very much vulnerable
to shifts in external factors.
10 Vol. 19 No. 4 | Economics Update 2012
What is the budget outcome for 2012-13? 1
Surplus (A)
Decit (B)
Contractionary (C)
Expansionary (D)
What is the budget stance for 2012-13? 2
Surplus (A)
Decit (B)
Contractionary (C)
Expansionary (D)
Which of the following is most likely to improve the budget balance? 3
An appreciation of the Australian dollar (A)
Lower global growth (B)
Higher terms of trade (C)
Increased government expenditure (D)
Which of the following is the main goal of the Governments medium term scal strategy? 4
Increasing the tax-to-GDP ratio (A)
Decreasing the level of government expenditure (B)
Achieving budget surpluses on average over the medium term (C)
Reducing government debt in the short term (D)
During an economic recovery, which of the following would be the effect of automatic 5
stabilisers on the budget?
Lower unemployment benets, higher taxation revenue (A)
Lower unemployment benets, lower taxation revenue (B)
Higher unemployment benets, higher taxation revenue (C)
Higher unemployment benets, lower taxation revenue (D)
A decrease in public expenditure is likely to lead to which of the following? 6
Increase in aggregate demand, increase in ination (A)
Decrease in aggregate demand, increase in ination (B)
Decrease in aggregate demand, decrease in ination (C)
Decrease in aggregate supply, decrease in ination (D)
Multiple Choice Questions
Economics Update 2012 | Vol. 19 No. 4 11
Which of the following is likely to improve the distribution of income? 7
Lower payment rate for unemployment benets (A)
Reduction in highest marginal tax rate (B)
Increasing the tax-free threshold (C)
Increasing the GST (D)
Which of the following is forecast to contribute the most to GDP growth in 2012-13? 8
Consumption (A)
Investment (B)
Government expenditure (C)
Net exports (D)
Which of the following has contributed to the fall in taxation revenue as a percentage of GDP? 9
Higher economic growth (A)
Lower consumer spending (B)
Higher terms of trade (C)
Lower unemployment (D)
Which of the following would lead to an increase in net primary income outows? 10
A budget surplus (A)
Decreased taxation receipts (B)
Increased taxation receipts (C)
Lower net public debt (D)
Short Answer Questions
Outline the major goals of the 2012-13 Budget. 11
Describe the economic outlook for the Australian economy over the next few years. 12
Discuss the impact of the 2012-13 Budget on economic activity. 13
Explain how cyclical and structural factors affected the budget outcome in the 2012-13 Budget. 14
Analyse the role of scal policy in the economic policy mix in 2012. 15
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Update_Shell_Economics 09.indd 1 27/6/09 10:52:21 AM
Quotes
Reactions to the 2012-13 Budget
Should the government be tightening fiscal policy when
large chunks of the economy are in effect in recession and
unemployment is about to rise? Ideally, noYet, with the terms
of trade barely off their historical peak and the economy still
close to full employment, obviously the budget should be
in surplus. Indeed, the surplus for 2012-13 should be bigger
than the $1.5 billion for which the government is budgeting.
At 0.1 per cent of gross domestic product, the surplus is barely
more than a rounding error.
Alan Mitchell, Australian Financial Review,
A surplus too small from a budget too tight, 9 May 2012
The Government has had to perform a difficult balancing act
in framing the 2012-13 Federal BudgetWhile we understand
Treasurer Wayne Swans objective to deliver a surplus in the
coming financial year, it is regrettable that this has resulted in
cuts to public services, jobs, and social security for some of our
most vulnerable community members. The Budget forecasts
confirm that Australias economy continues to be well-managed,
with unemployment much lower than that of the United States
and much of Europe. However, the Government must remain
conscious of the ongoing global economic instability and be
prepared to reconsider its position if necessary.
ACTU President Ged Kearney, Media Release, 8 May 2012
The nature of the policy changes, which redistributed
from the corporate sector to households with high marginal
propensities to consume, will help the Government deliver a
surplus without impeding domestic demand as much as if the
cuts had been imposed evenly across sectors.
ANZ Research, Australian Federal Budget Report, 8 May 2012
Budget Figures
2011-12 % of 2012-13 % of
GDP GDP
Fiscal balance -42.0 -2.8 2.5 0.2
Underlying cash balance -44.4 -3.0 1.5 0.1
Revenue ($bn) 336.4 22.8 376.1 24.2
Expenditure ($bn) 373.7 25.3 376.3 24.3
Because Treasury uses complex accounting methods, revenue and expenditure do
not add up precisely to the scal balance or underlying cash balance
Treasury Forecasts
2011-12 2012-13 2013-14
Economic growth 3% 3.25% 3%
Household consumption 3.25% 3% 3%
Business investment 18% 12.5% 8%
Ination (CPI) 1.25% 3.25% 2.5%
Wage price index 3.5% 3.75% 3.75%
Unemployment rate 5.25% 5.5% 5.5%
Participation rate 65.25% 65.25% 65.25%
Employment growth 0.5% 1.25% 1.5%
Current account (% GDP) -3% -4.75% -6%
Terms of trade (% change) 3.25% -5.75% -3.25%
Exports 4% 4.5% 4.5%
Imports 12.5% 7.5% 5.5%

Source: 2012-13 Commonwealth Budget Paper No. 1,
Statement 2
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