A lot of attention is paid to the Federal Government deficit, the mounting debt and the impact that cutting Government expenditure will have on national income. The Treasurer is preparing us for a tough budget in May, where the $50 Billion plus growth in annual debt needs to be reduced to zero growth by June 2013. That's a pretty big anchor to throw out in the hope of the private sector's ability to replace the expenditure with economic expansion.
With taxation running at about 22% of Gross Domestic Product (GDP), the current $53 Billion shortfall in taxation represents a required increase in GDP of $240 Billion, or a required 18% increase in GDP; that's if Government expenditure does not increase. If you allow for a 2% increase in Government Expenditure each year for two years then, from an annual expenditure base of $350 Billion, another $7 Billion in tax revenue is required for each of the next two years.
That $14 Billion increase in required taxation revenue requires about another $60 Billion increase in GDP (based on taxation equaling 22% of GDP). So the economy needs to grow by $300 Billion ($240 Billion plus $60 Billion) by 2012/13. That is nominal GDP growth of 22% over two years. Not impossible, of course, but definitely boom times are being predicted by the Government.
(Note: Our expectations for March 2011 GDP will be, at best, flat)
We are currently hearing from Ted Baillieu in Victoria that there are unexpected blowouts in the State's budgets. Well, it is not really unexpected if you look at the State Governments' debt growth since 2008. The State Governments have been doing a great job in maintaining our standard of living with annual debt growth (to February 2011) of $20 Billion. With the political power moving to the right in NSW and Victoria, and given Ted Baillieu's statements, you will clearly expect the State Governments to begin to bring their budgets into balance.
Total Government Debt, both State and Federal, now stands at $351 Billion (as at February 2011), a $77 Billion increase over the year. Without arguing the merits or otherwise of the move to balance the budget, the political forces in Australia are moving to decrease Government spending, which is private sector income, by a substantial amount. Their logic is that the private sector will expand.
Again, not arguing the merits of the current course of action, it is a better to understand the framework our economy is operating in, the future Government expectations, and how you can best manage the investing environment as events unfold.