Weakening growth puts pressure on future prospects

Much will be said about budget deficits and debt before we get to September 7, and even more after it.

Much will be said about budget deficits and debt before we get to September 7, and even more after it.

So just how tough will the next budget have to be?

Not as bad as you think, even though in just a few months the deficit has blown out 65 per cent almost entirely due to the weakening economy, which, while we're on the subject, Treasury didn't see coming.

Never mind that for six months the economy has been as close to a recession as you can get without being in one; GDP per head is growing at an annualised rate of less than 0.5 per cent.

But get this. One reason the economy is on the skids has been the hit from the contracting budget deficit, as shown by the fact that in the past financial year, it dragged down growth by 1.5 per cent.

Imagine what more deficit slashing, which both sides are committed to, or say they are, will do to growth.

Every economist knows the folly of aggravating an already softening economy by squeezing it fiscally.

That's why the government should have been running surpluses until now. Instead, it was reluctant to rein in the GFC stimulus once it was clear it was no longer needed, which was a year or so on.

Its only concession to the subsequent China-driven resources boom was a botched mining tax.

The legacy is an empty ammunition room when more fiscal firing power would have come in handy.

Needless to say, a budget perceived to be out of control, even with weeks of election pork barrelling to go, is a confidence killer.

Mind you, with low economic growth continuing to be a prospect, hanging on to a job could be a bigger worry than what might be in the next budget.

At least the Reserve Bank is on the case, though rate cuts are proving to be agonisingly slow in achieving anything other than higher property prices.

Don't get me wrong, it's not all bad.

Easy money and the weak dollar will do wonders for the sharemarket, which couldn't ask for more. Then again, it probably will.

It will, of course, be looking for higher profits. Well, it'll just have to be disappointed there.

And it'll take more than ultra-low interest rates to push property prices on the up and up when weaker economic growth must threaten jobs.

Anyway, it's the states you need fear most. They face the mother of revenue crunches as unemployment rises just as they're being railroaded into lifting their spending - more what you might call a quid pro quid - for the government's Gonski education spendathon, which has suddenly become bipartisan policy. That can only mean higher council, hospital and transport charges as well as job cuts.

Higher health insurance premiums will also get government approval since they are a given in our ageing society.

Then there are power prices. No respite here, even without a carbon tax, I'm afraid.

If Labor wins, there's no guarantee the European-determined carbon price really will be $6 a tonne next year since it's likely to be pushed up as power companies bulk-buy pollution permits as the easy way out, and the dollar drops against the euro.

True, the Coalition will abolish the emissions trading scheme. But the far bigger impact on electricity prices than on carbon has been the 2020 renewable-energy target.

Trouble is, both sides swear by it.

Twitter @moneypotts

In the red

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