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Budget analysis -

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Budget analysis

Broadcast: 11/05/2010

Reporter: Kerry O'Brien

Kerry O'Brien is joined by Chris Uhlmann, Alan Kohler and George Megalogenis for a panel analysis
of the Federal Budget as delivered by Treasurer Wayne Swan.


KERRY O'BRIEN, PRESENTER: Welcome to this special edition of the 7.30 Report, coming to you from
Parliament House in Canberra where Treasurer Wayne Swan has just delivered a Budget which will be
crucial to the Rudd Government's hopes of regaining the political initiative with an election just
months away. And as you've just heard, those hopes are pinned on economic credibility, claims of
beating the global recession with massive stimulus spending and returning the Budget to surplus
three years early. In fact, Wayne Swan is saying that he's delivering a more dramatically
successful rebound from this economic slowdown than recessions going all the way back to the '60s.
The faster return to surplus is partly due to a big boost in revenue from an economy heading back
to health, partly from the Government's promised spending cap and partly from about $20 billion in
new taxes, mostly from smokers and mining companies.

Shortly I'll be talking with the Treasurer and Opposition Treasury spokesman Joe Hockey, but first
for their analysis of this Budget I'm joined by our political editor Chris Uhlmann, author and
senior writer with the The Australian newspaper George Megalogenis and ABC finance commentator and
publisher of Business Spectator Alan Kohler.

Alan, your broad impression?

ALAN KOHLER, ABC FINANCE COMMENTATOR: Well I think this is one, from my point of view, for the
economic boffins. Looking at statement number two: the economic outlook, which is really having
such an impact on the bottom line of this Budget, which is what really gets it into surplus three
years early. And that is the nominal GDP, which is the thing that's relevant to tax receipts.
Normally when we look at GDP, it's real GDP, which is after taking account of prices. But nominal
GDP for this financial year and next financial year are forecast by the Treasury now to be 10 per
cent higher than they thought last year. Now we can say that they were too pessimistic last year
because they thought there'd be a recession and there wasn't, but 10 per cent is enormous. It
delivers nearly $100 billion in extra taxes over four years, which is where they get into surplus.

KERRY O'BRIEN: So do these figures stack up to you?

ALAN KOHLER: Well it's a big punt on the resources boom and in particular minerals prices going up.
The next financial year - not this one, but the one we're talking about in the Budget - the nominal
GDP is forecast to go up by 8.7 per cent, and of that five per cent is due to the terms of trade,
which is the net export prices - that's export prices divided by import prices. And it's just a
massive punt, 'cause they don't know what's gonna happen, obviously. It's just in the future; it's
a forecast.

KERRY O'BRIEN: They must be basing it on something.

ALAN KOHLER: Well they're basing it on what they're seeing and iron ore prices are s'posed to go
up. We've got spot iron ore prices are running high, spot coal prices are going up. So, everyone
expects the contract prices to be much higher than they were last year.

KERRY O'BRIEN: And that's essentially driving everything.

ALAN KOHLER: That's it. I mean, 8.7 per cent nominal GDP growth next financial year delivers a
surplus three years early.

KERRY O'BRIEN: George Megalogenis, how do all the figures stack up for you? The various claims of
spending caps, things like inflation and all of those key figures, growth figures and so on?

GEORGE MEGALOGENIS, THE AUSTRALIAN: The spending cap is really the easy side of this equation.
They've been able to hold spending to less than two per cent after inflation. Now they haven't cut
spending. In past recoveries from deficit to surplus, we've seen some budgets that have cut
spending quite viciously. This one is just putting a lid on what would otherwise be normal growth
in government spending. This allows the revenue to go straight to the bottom line. And really what
they're betting on is, as Alan mentions, this $100 billion in recovery in revenues compared to the
Budget this time last year, when we were fearing the worst from the Global Financial Crisis.

Now, I've sort of done a bit of a cut-and-paste on it: about $40 billion is from companies, another
$40 billion from workers and roughly the balance has come from the GST. So essentially the
companies that didn't go broke during the GFC and the miners that never went broke, the workers
that never lost their jobs and the consumers that kept spending - they're the ones that are pretty
much holding the Budget up. Now, the shocks looking forward: well, if the global economy takes
another hit, if the financial crisis that begins in Greece spreads to Spain, Italy, Portugal, you
know, if there's a second wave to this GFC, we're staring at another record deficit again.

KERRY O'BRIEN: So tell me this: how much credit do you think the Government can claim, rightfully,
from this, as opposed to what has simply been landed in its lap?

GEORGE MEGALOGENIS: Well it's the default credit, it's the credit that they chose not to spend
anymore in an election year. I mean, the political and the economic cycle demanded that they
produce a Budget like this, that pretty much all the savings would be offset - all the spending,
sorry'd be offset by savings, and there weren't that many new spending measures in the Budget
itself, and that the spending cap be applied in a way that allowed every bonus dollar that came
through upward revisions to revenue to go straight to the bottom line. Now, if they find that the
spending cap doesn't secure surplus because the revenue doesn't come in by as much, you're looking
at a Budget after an election of some quite savage spending cuts.

KERRY O'BRIEN: So, what part does the $20 billion of new tax play in this?

GEORGE MEGALOGENIS: Well, to the extent that it's all offset, because you're gonna lose pretty much
all that money for the reduction company - this is, we're talking about the mining tax ...

KERRY O'BRIEN: That's right. For a start. Yep.

GEORGE MEGALOGENIS: ... and also the ...

KERRY O'BRIEN: So that gets written off on company tax and on infrastructure spending and so on.

GEORGE MEGALOGENIS: And the changes to superannuation.

KERRY O'BRIEN: And the cigarette $5 billion over the next four years ...

GEORGE MEGALOGENIS: Is pretty much offset against the health, ...


GEORGE MEGALOGENIS: .... which is a.) the package that Kevin Rudd offered to the premiers to get
the health deal over the line and the extra spending in the Budget. So pretty much every dollar's
accounted for. There's not that - there's not that much slack in the return to surplus. The revenue
numbers have to come in on forecast.

KERRY O'BRIEN: OK, Chris Uhlmann, Wayne Swan said that this wasn't an election budget. But how do
you read the politics?

CHRIS UHLMANN, ABC POLITICAL EDITOR: Well it's all about the contrast, Kerry. It's security versus
risk - the security of the Government versus the risk of the unknown, of Tony Abbott and the
Coalition. Now the Government wants - it says that this is boring and tradesmanlike, but it knows
that in this kind of environment that being boring is a virtue when we live in such diabolically
interesting economic times. And it wants to get some of the credits back for the Global Financial
Crisis through this Budget, some of the ones that it believes that it earned. And it wants to do
more than that: it wants to reach into the future. This is becoming a motif of this government: to
reach into the future and claim a credit for something that hasn't happened yet. The Government
wants us to look over the Budget deficit of this year and the next to the $1 billion off in the
distance, and so it's got a pathway of getting us there. And I guess that where's the Coalition
will launch its attack: whether or not this is a credible pathway of getting us to that end point,
which is so distant as perhaps to be almost immeasurable at this stage.

KERRY O'BRIEN: What parameters does this set for how this next election is going to be fought? A.)
In terms of what we might - you know, is there any room for largesse from the Government, and where
does it put the Opposition once they start developing their policies in terms of what they can

CHRIS UHLMANN: Well the Treasurer said in the Budget lockup today during his press conference that
he didn't think that there was much room left for spending in this Budget, and that throws down the
gauntlet to the Opposition, that this will be an election campaign perhaps like no other where they
are fighting on a few principles and without too many gifts.

KERRY O'BRIEN: Oh, it wouldn't be surprised if there's a few gifts by the time it (inaudible). But
thanks very much to the three of you for that.