Return to Surplus - But What Is the Risk?

STATEMENT BY BCA CHIEF EXECUTIVE KATIE LAHEY IN RESPONSE TO THE 2010–11 FEDERAL BUDGET

“This Budget sees a sooner-than-expected return to surplus and the government meeting its own fiscal rules, but it introduces a huge question mark over future growth,” BCA Chief Executive Katie Lahey said.

The 2010–11 federal Budget forecasts a return to budget surplus by 2012–13 underpinned by the government meeting its commitments to cap real expenditure growth at 2 per cent and to constrain the level of tax to GDP. It also outlines a range of measures that have the potential to enhance productive capacity.

The proposed introduction of the Resource Super Profits Tax (RSPT), however, creates a new and substantial risk – both for the economic outlook and for the stability of the Budget itself.

“According to the Treasurer, this Budget is built on a ‘powerful rebound’ in economic growth. For Australia, this means our future growth will be critically dependent on high commodity prices and a strong business investment response,” Ms Lahey said.

“The Treasury has forecast a strong recovery in business investment – forecasting a 7 per cent rise in the coming year and a 12½ per cent rise in 2011–12. This forecast is based on continued strong confidence and investment from the mining sector.

“While Treasury claims in the long run that the introduction of the RSPT will lead to an increase in resource sector investment, this stands at odds with the reaction of investors over the past week. Their reaction clearly raises questions about the achievability of the investment forecasts.

“The government is playing a high-stakes game. If the resource boom was to falter or be killed off the whole budget would collapse in a heap.

“In its pre-budget submission the BCA called for a shift in the focus of revenue and spending to support business growth, job creation and workforce participation.

“The new initiatives announced in the Budget on skills training, infrastructure, and health investments, including the commitment to introduce individual electronic health records, should all assist in raising participation and productivity and thereby expanding Australia’s productive capacity. The modest cut in the company tax rate to 28 per cent by 2014–15 will help to support investment and growth.

“One of the BCA’s critical principles is to support growth by shifting to taxes that are less volatile and have less harmful effects on growth.

“The government is instead laying Australia’s future budget foundations on shaky ground by tying future revenues more strongly to commodity prices. Treasury itself acknowledges that the RSPT will vary with commodity prices and that these are difficult to predict.

“The government should better explain and define the risks around future RSPT revenues. It has not provided an assessment of risks against commodity price movements or identified its new exposure to 40 per cent of mining company losses in its statement of contingent liabilities.

“Given the importance of the resources sector it will be important to avoid the current uncertainty and confusion, and the perception that is now taking hold that sovereign risk is growing for investing in Australia.

“At a time of continuing global financial uncertainty it will be critical that business is consulted to ensure the government gets the details of the new mining tax right so we don’t send the wrong signals to investors.

“In Treasury’s own words not all resource rich countries have been able to translate resource wealth into sustained economic performance.  The government’s prime responsibility should be to ensure that Australia does not join this club,” she said.