Tiny surplus only 0.1% of GDP

The expected surplus for 2012-13 of $1.5 billion to be announced by Deputy PM-Treasurer Wayne Swan tonight is pretty insignificant in a $1.5 trillion economy – i.e. it’s only one-tenth of 1% of GDP (see Inspector Budget). Being fairer to the Government, it’s around 0.4% of total Government revenue, so for every $100 the Government receives it will save around 40 cents.

However, in terms of economic impact, what matters isn’t the size of the surplus, but the change in the budget balance from year-to-year, and the Government is forecasting the largest turnaround in the budget balance ever. As discussed in my previous post Budget turnaround looks implausible, I doubt it will achieve this, but if it does it will certainly give the RBA room to move on interest rates because it will impose a significant negative shock on the economy.

It’s difficult to gauge at the moment without knowing all the budgetary details how large the shock will be, however. To the extent savings are achieved by cutting/delaying payments on imports (e.g. spending on the Joint Strike Fighter) or by reducing tax concessions on super (which won’t have a large impact on current consumption expenditure), the expected contractionary impact of the budget will be lessened.

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