Note: Where available, the PDF/Word icon below is provided to view the complete and fully formatted document
Report on employment and economic prospects

MONICA ATTARD: Well, on the first day back at work, the Prime Minister's attention was turned not only to the Wik decision but also to the Budget. The Treasury and the Treasurer are completing their mid-term review of the economic forecasts in the first Howard Budget, and all the indications are that so far the forecasts Budget look surprisingly good. The results of the review will be made public before the end of next week. And, as our economics correspondent, Peter Martin reports, if the Government wants to, it can present a picture of an economy in even better shape than was expected when Peter Costello presented the first Howard Budget last August.

PETER MARTIN: Back 12 months ago, before the Federal election, back nine months ago during the election, even back six months ago, the present Treasurer, Peter Costello, had something of a vested interest in suggesting that Australia's economic position was getting worse. He could blame it on the previous government. But somewhere around the middle of last year, the Treasurer's attitude changed. Peter Costello began to own the state of the Australian economy. From then on, wherever possible, every piece of economic news was talked up. Costello and Howard were taking the credit.

The mid-term review of budget forecasts, due out in days, will allow them to take more credit still. Inflation is now looking substantially better than it did at budget time. A headline forecast of 1.5 per cent now looks more likely than the 2 per cent forecast for the financial year last August. Wages are also growing slower than forecast at budget time, perhaps by 4.5 per cent over the financial year instead of the forecast 5 per cent.

It's true that Australia's rate of economic growth is arguably slipping from the budget time forecast of 3.5 per cent, but if Peter Costello wants to, he can get away with claiming that it is not. That's the assessment of Bankers Trust, which believes that despite some signs of weakening growth, that 3.5 per cent forecast will stay. Economist David Basenese (?).

DAVID BASENESE: We wouldn't be surprised if they did retain the 3.5 per cent growth rate.

PETER MARTIN: If they kept no change?

DAVID BASENESE: Well, that is not .. it's still plausible because they could, for example, revise up the investment outlook. Private consumption does clearly look weaker, and if they do revise that one down, they could offset that by higher investment.

PETER MARTIN: Why would they want no change?

DAVID BASENESE: Another concern is that if you do revise down your DDP (?) forecast, it does make your budget outlook look a little bit worse as well. You've got higher unemployment benefits; also less tax revenue.

PETER MARTIN: So for almost cosmetic reasons, the Government would like to, if it could, maintain the forecast in the Budget for economic growth?

DAVID BASENESE: Well, I wouldn't really say cosmetic reasons. It doesn't really need to change the forecast. I mean, it's still plausible, it would be seen plausible within financial markets, and for those reasons it could still keep the 3.5 per cent.

PETER MARTIN: Are we seeing perhaps a change in the attitude of the Government now that it's well and truly in government, now that it's been in government for getting on to a year, that it's now, if you like, wanting good economic news, rather than bad economic news which it could blame on its predecessor?

DAVID BASENESE: Well, I think that's always the case when you move from Opposition to Government - you want the data to look better.

PETER MARTIN: Is the Budget outlook though likely to suffer anyway because of the Democrats holding up measures in the Senate, and also lower inflation, which must cut into the Government's earnings?

DAVID BASENESE: Well, I think lower inflation is the main story. Inflation is ....

PETER MARTIN: The main story? That's going to be the thing which will harm the Budget deficit the most?

DAVID BASENESE: Certainly, if you look in the forward years, one to two years out, lower inflation outlook does cut into your revenue estimates. Weaker growth in nominal incomes, for example, lower corporate profits, lower growth in aggregate wages.

PETER MARTIN: Even if the economy is growing strongly?

DAVID BASENESE: Yes, sure. And what that means is you get less fiscal drag. This has been something that governments have relied on a lot in previous years under a high inflation environment.

PETER MARTIN: So no matter what the Government does to its growth forecast, it's likely to have to own up to a worse budgetary position than it expected?

DAVID BASENESE: Yes. I mean, I think what governments are finding now is that, as with business and consumers that need to adjust their inflation expectations, government has to also, and they simply can't rely on the strong growth in revenues that they have had, that they were able to rely on in the past.

PETER MARTIN: How much might the budgetary position by harmed as a result of merely that desired lower inflation?

DAVID BASENESE: Well, for example, when one to years out, you could find that the revenues are $1 to $2 billion lower than they currently forecast. It could be as much as that, if you do get quite significant downward revisions to the inflation outlook.

PETER MARTIN: More significant than anything the Senate might do to the Budget?

DAVID BASENESE: More significant than anything the Senate has done at this stage.

PETER MARTIN: But the really good piece of economic news from the public's point of view likely to come out in the mid-term review, concerns employment. The budget time forecast of a fall in the rate of unemployment to 8.25 per cent by mid-year, derided by many at the time of the Budget, now looks actually achievable. Already it's looking as if the unemployment rate could fall to 8.5, perhaps a bit less. When the two cuts in interest rates already introduced have their effect, 8.25 per cent may not be that far out of Peter Costello's ballpark.

MONICA ATTARD: Peter Martin reporting there.