Brace for tough budget
The Age
Thursday March 24, 2011
Treasurer warns that Japan, floods and oil will bring fiscal caution, writes Clancy Yeates. TREASURER Wayne Swan has begun softening up the public for a tough budget, as the economy comes under more pressure from Japan's earthquake and tsunami.After a spate of natural disasters here and overseas, Mr Swan yesterday said the government would have to "do a lot of things in this budget that won't be popular" to achieve the surplus it promised.Treasury had advised that the disaster in Japan, Australia's second-biggest trading partner, was likely to further wound key exports such as iron ore and coal, Mr Swan said.Alongside the damage to growth caused by Queensland's floods and tropical cyclone Yasi, the economic fallout from Japan's crisis would require the government to make "tough calls" now to ensure a surplus in 2012-13, Mr Swan said."It is against the backdrop of these natural disasters that we will spend the coming weeks putting the final touches on our fourth budget," Mr Swan told Parliament."Recent events, both here and abroad, will make a difficult task even more difficult."Mr Swan said the budget would bear the brunt of higher costs in the first years of its four-year forward estimates period, and government revenue would "take a hit" from short-term economic weakness.The government would keep its promise of limiting real spending growth to 2 per cent a year, he said, arguing the return to surplus was needed to help manage the resources bonanza."We understand that this will mean that we need to do a lot of things in this budget that won't be popular, but they'll be the right thing to do," he said.The tragedy in Japan is another blow to Australia's economy after cyclone Yasi and the floods. The Reserve Bank and Treasury estimate the domestic disasters alone will knock 0.5 percentage points off the growth rate this financial year, before spurring a rapid bounce-back.The main economic impact is likely to be felt in commodity exports, which were already hard hit in the March quarter by the flooding of mines and damage to transport infrastructure.Although analysts had forecast some of the damage would be offset by a rise in export prices resulting from lower supplies, Japan's earthquake has driven down the price of products.Coal prices have fallen 7 per cent since Japan's earthquake and iron ore has slumped by 4 per cent as markets fret over the cost to the world economy of Japan's series of disasters.Iron ore exports were worth $47 billion to the economy last financial year and coal $33 billion, so even slight changes in prices will have a big effect on government revenue.Mr Swan also warned of the "considerable risks" of higher oil prices caused by the uncertainty surrounding Japan's nuclear crisis, which could further dent the global recovery.As well as protecting the surplus, Mr Swan said the budget would "keep the wheels of reform turning", with a focus on tackling the skills shortages and infrastructure bottlenecks that loom as the main constraints on the economy.
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