Australia's Financial Crisis

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Last Updated: 6 November 2008

Canberra has issued revised economic forecasts showing that three-quarters of the government's budget surplus has evaporated. [ABC]

Australia's budget position has dramatically slipped, as the global financial storm cuts a swathe across the world.

Canberra has issued revised economic forecasts showing that three-quarters of the government's budget surplus has evaporated.

Growth is slowing and unemployment is set to rise.

And the government is not ruling out a return to deficit.

Canberra correspondent Linda Mottram reports market economists though think the government is still too optimistic, especially as Asian economies take a buffeting.

Australian governments routinely release revised budget forecasts half way through the fiscal year. Few though have been as eagerly anticipated as this one. Because since the Rudd government's first budget last May, it has dawned on the world -- and on the Rudd government -- just how calamitous is the global financial crisis.

So although Australia has made much of its responsible economic management, including a significant budget surplus, and although it has repeatedly said Australia is better placed than most countries to weather the financial storm, at the end of the day, it is all in the numbers. And the Australian Treasurer, Wayne Swan, used dire language as he faced journalists with the revised forecasts.

"The first point that I want to make is that there's no point in trying to sugar coat these figures. The global financial crisis has smashed a $40 billion hole in the budget," he said.

It's not the kind of language to inspire confidence, which is already low in Australia. Then the Treasurer fumbled to find the critical inflation forecast.

Market watchers say the value of the Australian dollar slipped as those few moments of hesitation by the man charged with the nation's purse-strings were televised nation-wide.

On the other hand, in compiling the revised forecasts - described by many market economists as optimistic - Australian Treasury officials knew they could not afford to talk the economy down.
So what is the outlook, according to the nation's Treasury?
- Higher unemployment, up one-and-a-half per cent to 5-and-three-quarter per cent by June 2010;
- Falling tax receipts which, coupled with recent government spending initiatives designed to help keep the economy afloat, mean that 3/4 of the anticipated budget surplus has been wiped out.

There is a plus side, Treasurer Wayne Swan says.

"Growth is expected to slow to two per cent in '08-09, three-quarters of a per cent lower than forecast at the time of the budget," he said.

"This is slower growth, but it is stronger growth."

But there is a strong body of opinion now that things are much worse than the Australian government admits. Stephen Walters is chief economist in Australia for the global financial company, JPMorgan Chase.

"To me, it's pretty simple, that if your economy's in recession - and perhaps this explains the difference, is that the government clearly doesn't think the economy's in recession - I do," he said.

"We've got GDP growth contracting both in the current quarter and in the first quarter next year, now that in itself is going to drive unemployment much higher than the government forecasts, and therefore there's a much bigger drain on the government's budget position."

Stephen Walters also says there is a signal in the swathe of recent interest rate cuts by Australia's central bank, the Reserve.

"The extent to which the Reserve Bank has cut interest rates in the last weeks, matches what was done in the 1991 recession," he said.

"Now, I think there's a message there - what's particularly worrying is that the offshore economic and financial conditions remain awful, and I think even if domestically Australia has some pretty sound fundamentals, I think the tidal wave of bad economic and financial news from offshore is going to swamp these official forecasts."

He says with the world's biggest economy facing recession, Asia is feeling the pressure.

"What's likely to happen now is that wave of weaker export growth and weaker demand is going to hit Asia, and remember 60 per cent of Australia's exports go to those Asian economies," he said.

"Now of the 12 biggest economies in Asia, six of them already are in recession - one of them that is not is China, but I suspect growth in China is weakening."

The fall of the dominoes might yet expose much greater economic vulnerability for Australia.