Monday, August 12, 2013

Budget update concedes threat of bleaker outlook for jobs - The Australian

Treasury and Finance are set to issue their independent pre-election Economic and Fiscal Outlook today.

Prime Minister Kevin Rudd has taken aim at Opposition Leader Tony Abbott over government cuts. Source: News Limited

THOUSANDS of Australians could be kept out of work for a year longer than previously forecast, according to a federal budget update that quantifies the risks to the economic outlook.

The final budget update before the election has confirmed a deficit of $30.1 billion this year, the same as Labor announced earlier this month, but also includes an "alternative scenario" with a bleaker outlook for jobs.

The independent Treasury analysis concedes the threat to employment after market economists took a sceptical approach to the government's claim that unemployment would fall quickly from 6.25 per cent to 5 per cent in the year to June 2016.

The "alternative scenario" would see about 115,000 people remain out of work for one year longer than in the official forecasts.

Today's release of the pre-election economic fiscal outlook, or PEFO, escalated the political debate on the economy, with Kevin Rudd challenging Tony Abbott to reveal the costs of his policies, while the Opposition Leader vowed to release more details within days.

The Prime Minister said the release of the PEFO meant it was "D-Day" for Mr Abbott when it came to the Coalition announcing its budget bottom line.

Mr Abbott responded by pledging to keep his promises, even if the budget forecasts turned out to be wrong.

"We will keep the commitments that we make. All the commitments that we make will be commitments that are carefully costed and the savings will all be well-known well before people go to the polls on September 7," he said.

Treasurer Chris Bowen and Finance Minister Penny Wong released an economic statement on August 2 that forecast an increase in the unemployment rate to 6.25 per cent this year and next, but claimed it would fall to 5 per cent the following year.

Bank of America Merrill Lynch Australia chief economist Saul Eslake told The Australian last week there was a "jarring disconnect" in the assumption of a sudden fall from 6.25 to 5 per cent in just one year.

"Treasury forecasting hasn't done well, and at first glance it doesn't look as though things have improved since the review undertaken earlier this year," he said.

PEFO acknowledges that if Treasury used the "budget projection methodology" it used a decade ago the unemployment rate would instead fall to 6 per cent in 2015-16 and 5.75 per cent in 2016-17.

The difference - 1 per cent of the labour force - amounts to about 115,000 people seeking jobs.

The alternative scenario would be better for the budget bottom line, however, because it projects slightly stronger economic growth of 3.25 per cent from 2015 to 2016 and therefore stronger revenue.

While confirming Labor's forecast of a budget deficit of $30.1 billion this year, PEFO forecasts a surplus in 2016-17 of $4.2bn, slightly up on the $4bn projection in the August 2 economic statement.

The PEFO says the economy should grow 2.5 per cent this year and then gain momentum to post 3 per cent growth in each of the following three years through to 2016-17, in line with the economic statement.

However, it warns that conditions are volatile and that the forecasts depend on commodity prices and the terms of trade, the factors that have proven the official forecasts wrong in the past.

"As always, there remains significant uncertainty around the profile of the terms of trade, in both the near and medium term," the PEFO states.

"Commodity prices are inherently volatile and unexpected changes to the global demand or supply of commodities can have a significant impact on world commodity prices in either direction.

"What is important to recognise, though, is that while the terms of trade are in decline, the level at which they might settle, and at what point in the future, continues to be highly uncertain."

A major departure from the government's forecasts on August 2 would have shocked observers and undermined Labor's economic credibility after years of revisions to official budget predictions.

The PEFO was prepared by officials from the Treasury and Department of Finance and signed off by the secretaries of the two departments without any supervision or interference from ministers.

Campaigning in Townsville, Mr Rudd this morning said Mr Abbott did not have the "guts" to release his own costings.

The Prime Minister said if the Australian people knew Mr Abbott's plans they would be worried about voting for him.

"It is D-Day when it comes to Mr Abbott announcing his own bottom line," Mr Rudd said.

"Mr Abbott has been preparing for this election for three years.

"He's known precisely that we would get to this point where the PEFO document would be made public.

"It is fundamental for the Australian people to know where Mr Abbott's $70 billion worth of cuts to health, education and jobs are going to fall."

The Prime Minister also said Nationals Leader Warren Truss should detail which infrastructure projects the Coalition would not proceed with after Mr Truss reserved the right to re-prioritise projects.

Mr Abbott said it was unfortunate that under Labor, budget costings had been "consistently unreliable". He believed all areas of government would lift their game under a Coalition government.

But he said any worsening in the budget position would not be an excuse for the breaking of any promises, and he would resist any pressure to do so.

Mr Abbott said the Coalition would grow the economy, and he was confident reforms like axing the carbon and mining taxes and lowering the company tax rate would pay dividends.
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