Wayne Swan on the economy

In a speech to the Australian Business Economist group this morning, Treasure Wayne Swan set out his views on what’s happening in the economy. It was a lengthy speech, so here’s the key takeaway points from what he said and a summary of what this actually means:

1.  Election policies will have to be costed

Swan used this morning’s speech to push for greater budget transparency.

“It is important that we are constantly assessing the rigour of the economic and fiscal information presented in the budget,” he said.

Swan announced additional funding to the Parliamentary Budget Office, which he said will enhance the capacity for costings to be prepared in the lead up to the election.

“This will remove the capacity of any political party to try to mislead the Australian people and punish those that do,” he said.

And he committed to releasing the 2012-13 preliminary underlying cash balance outcome once there is a reliable figure.

“There will be no fiscal surprises after the election,” Swan said.

What he means

Swan is turning the screws on the Liberals to announce fully-costed policies at an earlier stage in the election process. He’s also protecting Labor in the event of a Coalition win at the election. The new measures would make it tough for an incoming government to exaggerate the size of any budget black hole it may inherit and use it as a reason to break promises.

2.  There’s going to be another revenue shortfall

In his speech, Swan stressed the rare economic circumstances to hint at another budget shortfall.

He said the tax-to-GDP ratio in 2012-13 is expected to be below 22% for the fifth successive year, which last occurred in the early 1990s recession.

“No government in more than 30 years has run a surplus with a tax-to-GDP ratio below 22%,” Swan said.

Figures released last week showed cash receipts were $3.9 billion below what was expected at MYEFO (Mid-year Economic and Fiscal Outlook) and Swan said early data for January suggests another $2 billion could be added to that revenue shortfall.

“We’ll update our numbers in the budget in under three months’ time, in the usual way – but it’s clear that lower revenue has been the key factor influencing our fiscal outlook,” he said.

What he means

Swan has already abandoned his promise of a budget surplus and is now setting the scene for another May budget deficit. Expect more cuts in the budget which are “in line with Labor values”. Reductions to superannuation concessions for high-income earners remain in Swan’s sights.

3.  The dollar is going to stay high for the foreseeable future

Swan continued to emphasise the unique economic circumstances which Australia and the world is in and suggested we get used to it.

“We’ve experienced a once-in-a-century terms of trade boom, an equally unprecedented resource investment boom and a rapid and sustained appreciation of the Australian dollar,” he said.

“More recently, the dollar has remained stubbornly high as our terms of trade have come off and as interest rates have fallen, adding to already painful adjustments for some sectors.”

What he means

Don’t hold your breath for the Aussie dollar to come down any time soon. Swan wants Australian businesses to get used to the changed economic circumstances.

4.  The government’s revenue base has changed

Swan also tied the government’s budget black hole to what he described as “long-term structural changes in private spending and borrowing behaviour”.

He highlighted the global financial crisis and the subsequent shift in global growth from West to East as having “imposed profound structural change on our economy”.

“While the GFC was the catalyst for ripping $160 billion in revenues out of our budget, we didn’t anticipate the full impact of global volatility and broader changes on our revenue base or how long they would last,” he said.

“We have seen a longer term hit to our revenues from the GFC, ongoing global volatility and the evolution of the mining boom through its enormous investment phase.”

Swan said these impacts have lasted longer than we originally expected.

What he means

It’s not the government’s fault that it can’t turn a budget surplus. Swan is making it clear that the government’s revenues have taken another hit from the massive fall in commodity prices and the high dollar.