Spending cuts slow economy

Austerity measures by governments desperate to reduce deficits are slowing the economy. New figures show that spending by governments on services fell another 0.2 per cent in the December quarter, on top of a 1 per cent fall in September.

Austerity measures by governments desperate to reduce deficits are slowing the economy. New figures show that spending by governments on services fell another 0.2 per cent in the December quarter, on top of a 1 per cent fall in September.

Amid a range of positive economic data on Tuesday that implicitly endorsed the Reserve Bank's decision to leave interest rates on hold, the Bureau of Statistics delivered sombre news from the 20 per cent of the economy that comprises government spending.

Business asked for government to cut spending, and now they're doing it: at both state and federal levels. In the six months to December, real seasonally adjusted government spending - both consumption and investment - has fallen by almost 5 per cent at federal level, and by 2.5 per cent at state and local government level.

Between them, this has taken almost $1 billion a month out of the economy, and roughly 0.75 percentage points off Australia's GDP - a hefty brake on top of the dramatic slowing in non-resource sectors as a result of the high dollar.

At face value, the sharp fall in budget sector spending has been offset by a stunning jump in investment by government business corporations, which shot up 85 per cent in the December quarter. But the Bureau of Statistics implied that most of that was in purchases of a big private sector asset rather than new investment.

Other indicators released on Tuesday were generally positive, although they confirmed the division between rapid growth in Western Australia and stunted growth, or even shrinkage, in south-eastern states. The figures showed:

■ Net exports added 0.6 per cent to growth in the December quarter, almost entirely due to rising export volumes of minerals.

■ Retail sales rebounded by 0.9 per cent in January, after falling for three months in a row.

■ Vehicle sales in the first two months of 2013 have shot up 8 per cent on last year, with the entire growth coming from four-wheel drives. While car sales are down 4 per cent, SUV sales are up 17 per cent, and light commercial 4WDs are up 34 per cent.

■ The Australian Industry Group's index of service sector activity climbed by 3.1 points in February to its highest level since June 2012, although chief executive Innes Willox noted it represents a slowing decline rather than growth.

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