Note: Where available, the PDF/Word icon below is provided to view the complete and fully formatted document
Analyst comments on budget deficit forecast and Government's threatened expenditure cuts

ELLEN FANNING: And finally to the tough budget task facing the new Howard Government - its commitment to cut the deficit by $8 billion over the next two years. Treasurer, Peter Costello, wants the Budget back in surplus by 1998-99 and he's promised he won't increase taxes or break election commitments to do it. That leaves spending cuts. To discuss what effect those cuts will have on the economy and the prospects for the Budget, A.M. spoke to former economics adviser to John Howard. Kevin Wilde talked with Hugh Hodges, who is now an Associate Director with Norwich Investment Management.

HUGH HODGES: We wouldn't think that it would lead to growth getting so low that there's a risk of recession, but obviously, the more you cut, the slower the growth, and it does make it harder to get the revenue in that case.

KEVIN WILDE: The Budget deficit figure certainly wasn't a surprise for many in the market and the new government had suspicions that things would be this bad. Should they have curbed some of their own promises during the election campaign, knowing that things weren't going to be exactly how Labor was saying they were going to be?

HUGH HODGES: Some of the people in the markets would have preferred that to happen. I think that you can't get away from the fact that, in an election campaign, the political factors overwhelm most other factors. It was at least encouraging that you had all their new spending measures supposedly costed. You know, you can always quibble about figures, but I think that would be the only positive out of that whole outcome, and you would have to say that it would have been nicer if there weren't as many spending promises made, even if they were costed.

KEVIN WILDE: Is the Government painting a more negative situation than it actually is, that with a rebound with growth later this year, that the Budget will be a little bit better? It still might be in deficit, but it won't be as bad as it might be at the moment.

HUGH HODGES: Well, that's certainly possible. The size of the Budget deficit that was announced yesterday is certainly disappointing at this stage of the cycle. Now, certainly, by August, we could have some of those growth forecasts revised up again. We've just seen some stronger growth figures seem to be coming through from the US. We'd certainly be expecting stronger growth figures coming through on Australia by mid-year, and therefore some of this large increase from the deficit from those factors may be unwound and you might see a slightly better or even a reasonably better forecast due to those factors by budget time.

KEVIN WILDE: Was yesterday all about softening up the community for, not only spending cuts, but a tough budget later in the year?

HUGH HODGES: I suspect that there was as much political playing, that normal political posturing when you come in, saying that the cupboard is bare. Not necessarily softening it up for a very tough budget, but the sort of political games that come through, as there was the necessity to really say exactly what the state of the Budget is and the fact that there is a lot of work to be done in that area, which indeed is probably our greatest economic problem at the moment.

ELLEN FANNING: Hugh Hodges, Associate Director with Norwich Investment Management and a former economics adviser to the new Prime Minister, John Howard.