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Fed:Recession hit economy to shed a million jobs

By Colin Brinsden, Economics Correspondent
12 May 2009 7:37 PM

CANBERRA, May 12 AAP - The federal government's pathway back to a budget surplus looks set to be a long and painful one for the million Australians who are likely to lose their job over the next two years.

And that assumes that Treasury's economic growth projections are near the mark, and some $22 billion of savings are achieved.

"This budget is forged in the fire of the most challenging global economic conditions since the Great Depression," Treasurer Wayne Swan told parliament, handing down the Rudd government's second budget on Tuesday.

"To Australian people I say, this is not an easy budget for easy times."

There are positives in the budget papers.

Single age pensioners will get an extra $30 a week, another $22 billion will be spent on roads, ports and railways, and the enhanced home owners grant remains near enough intact for now.

But the budget numbering is dire.

As expected, the budget bottom line is forecast to sink further into the red in 2009/10 at a shade under $58 billion - larger than in the recessions of the 1980s and 1990s as a proportion of gross domestic product (GDP).

And it will stay around that level in 2010/11.

This financial year the deficit is expected to be just over $32 billion, $10 billion more than was estimated just a few months ago.

A huge $210 billion has been wiped off revenues over the next four years, up from the $115 billion shortfall predicted in the Updated Economic and Fiscal Outlook released in February.

"Global recession has been unleashed on Australia with a brutal, uncompromising force," Mr Swan said.

"Since September last year, almost all major economies have gone into recession, dragging ours into recession as well."

Economic growth is forecast to finish flat this financial year, but then contract by 0.5 per cent in 2009/10 as the recession takes hold.

Still, according to the budget papers, without the government's stimulus packages, GDP would have contracted by a further 2.75 per cent.

Further out in 2010/11, GDP is forecast to remain below trend at 2.25 per cent growth, and then accelerate over the next two years to 4.5 per cent.

This may sound ambitious, but Treasury says these figures are conservative and compare with an average 4.8 per cent growth rate in the aftermath of the 1980s recession and four per cent after the one in the 1990s.

Treasury explains in the budget papers that a period of below trend growth will result in "substantial spare capacity" becoming available, while the economy is assumed to grow above trend as the spare capacity is brought back into use.

The budget figuring also shows that last week's dip in the jobless rate to 5.4 per cent from 5.7 per cent is likely to be a one-off.

The unemployment rate is now expected to hit six per cent by June this year, and accelerate to 8.25 per cent a year later - well above the previous estimate of seven per cent .

It then extends even further to 8.5 per cent in 2010/11, which translates into around one million people on the dole.

Again the budget papers say the jobless rate would have been closer to 10 per cent without the stimulus packages.

The way back to a budget surplus looks set to be a long slow grind, and as "temporary" as the last run of deficits during the 1990s recession.

The deficit winds back marginally to $44.5 billion in 2011/12, then shrinks to a still hefty $28.2 billion in 2012/13, according to the forward projections.

The surplus doesn't return until 2015/16.

"It will take time, and it will take discipline," Mr Swan said.

"It will take hard choices, doing more with less."

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