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Fed: Big budget deficit fault of government's of "both stripes"

By Colin Brinsden, Economics Correspondent
11 May 2009 12:01 AM
EDS: Strictly embargoed until 0001 AEST Monday, May 11

CANBERRA, May 11 AAP - Massive government spending in the boom times means the federal budget will be deep in deficit well after the global financial crisis has disappeared, an independent forecaster says.

Access Economics is forecasting a $58.9 billion deficit for Tuesday's 2009/10 budget, allowing for an extra $9 billion of infrastructure spending and $3.9 billion for pension reform.

In its Budget Monitor, it expects a $53.2 billion deficit in 2010/11.

For 2009/10, the deficit would represent 5.0 per cent of gross domestic product (GDP), trumping the deficits racked up during the early 1990s recession and the deficits of the Whitlam years, it says.

Access economist Chris Richardson says the damage to the budget bottom line was done well before the past year.

"The boom in the budget in recent years was brilliant. We then promptly spent most of it," Mr Richardson told AAP.

"The federal budget will be mired deeply in deficit after the GFC (global financial crisis) is long gone."

He said governments usually hold their policy fire to assist with fighting downturns, but in the past six years parties of "both stripes" had handed back the fiscal dividend of the good times, limiting the ability to defend Australia from recession.

However, he expects this recession will be smaller, partly due to a healthy banking system and a smaller slowdown in China than in much of the world.

That said, in the short term the "worse lies ahead".

"The economy may be recovering through 2010/11, but there are lags between the economy and the budget, so 2010/11 will be yet another year of budgetary sackcloth and ashes," he said.

"We suspect the regrets around poor policymaking will be a millstone around the neck of ordinary Australians for some time to come."

Long term, he expects Treasury's next Intergenerational Report (IGR3) will be "ugly" with the `primary' deficit 40 years hence blowing out to 6.2 per cent of GDP from 3.5 per cent in IGR2.

That is even worse than the 5.0 per cent forecast in IGR1 "because we spent the years since throwing money around", he said.

The IGR is released every five years, the last being in 2007.

Mr Richardson expects Treasurer Wayne Swan will spend much of budget night explaining why the government needs to spend more to protect the budget.

"That's fine, but it is the second task - the hard yards of budget repair - which will require Australia's politicians to have real courage," he said.

He said the task in repairing the budget is both "massive and mean".

To put some perspective on this, to raise an extra $25 to $30 billion a year that would be needed would mean abolishing the entire Defence Department, or abolishing the age pension rather than raising it.

Or it would mean raising the marginal tax rate above $300,000 to 100 per cent, or for those earning above $40,000 to 45 per cent.

"These aren't palatable options for politicians, not even taking a bit of each and doing it over a few years," Mr Richardson said.

But he said there is a "menu of silly spending" ripe for cutting, ranging from the family Tax Benefit B - "paying people to stay at home" - to the lack of means testing on the private health insurance rebate.

Tax cuts have already been legislated from July 1 this year, and from July 1, 2010.

"You'll have to wait close to a decade until you get the next one," Mr Richardson said.