ACCI 2011-12 Pre-Budget Submission
The Australian economy has proved resilient to the global financial crisis (GFC) and a steady, albeit uneven, recovery has begun to take hold. Accommodative fiscal policy settings were an important factor underlying the performance of the economy but economic challenges confronting the Australian Government at the 2011-12 Budget are markedly different to those we expected to face in the wake of the global recession. Rather than spare capacity and elevated unemployment rate, the economy in 2011 will be pushing up against capacity constraints and approaching full employment.
Economic conditions are markedly different to those that were envisioned when the Government's fiscal stimulus measures were adopted and require that fiscal policy be re-calibrated. The stimulus measures were designed to support activity in an economy where unemployment was expected to return to trend growth and realise full employment in 2011. To an extent, investment projects that were intended to take advantage of underutilised capacity in the economy will instead compete with the private sector for scarce resources and add to inflationary pressures. The Australian Chamber of Commerce and Industry (ACCI) believes there is a strong policy case for tightening fiscal policy at the 2011-12 Budget and the Government should aim to deliver a 1 percent point reduction in recurrent spending.
Failure to tighten fiscal policy will lead to higher interest rates. There is a clear and uncontentious trade-off between fiscal and monetary policy in the short-term. The choice confronting the Government at the 2011-12 Budget is between leaving fiscal policy settings and letting the Reserve Bank of Australia (RBA) deliver expected further interest rate rises later in the year; or making the deliberate decision to reduce spending in order to ease the pressure on monetary policy. Research by the International Monetary Fund (IMF) also demonstrates that larger deficits and the public debt leads to higher longer-term interests.
The Government's plan to cut spending and impose a levy to raise $5.8 billion to fund a reconstruction effort in Queensland constituted a modest fiscal tightening. The reaction of the bond market to the announcement was to remove 10 basis points from the expectations of monetary policy tightening over the next twelve months and proves the trade-off argument.
ACCI also maintains the view that any tightening in fiscal policy should be delivered by spending cuts rather than raising the tax burden, temporary or otherwise. Increases in tax rates would be damaging to economic activity and Australia's economic competitiveness. The deficit exit strategy in place relies solely on an increase in tax receipts to return the Budget to surplus in 2012-13, there is scope in the Budget to deliver savings on the expenditure side. In order to realise these savings, ACCI believes a 'root and branch' review of government spending is necessary. The Government should also provide more detail regarding how it intends to achieve its proposed 2 percent real spending cap in order to provide guidance on its deficit exit strategy.
Tighter fiscal policy should be complemented by an ongoing program program of productivity enhancing tax and microeconomic reform. The Government needs to commit to extending upon its initial response to the Henry Tax Review's recommendations. The forthcoming Tax Forum due to be held in October 2011 offers a genuine opportunity to further the process of building consensus and community support for such a program.