"The global financial crisis has smashed a $40 billion hole in the budget."
Those were the dramatic words that the Federal Treasurer, Wayne Swan, chose today to launch the official mid-year review of his May budget. Many, though, suspect that he chose the timing of his announcement, even more carefully than his words.
This was bad news, on a grand scale. But it still might be overlooked — after all, the eyes of the world are now fixed firmly on the US presidential election.
So what do the backroom boys and girls at the Federal Treasury believe is now in store for us? It was they, after all, who put together the weighty 257-page document, officially known as the Mid-Year Economic and Fiscal Outlook, which Canberra people fondly call the MYEFO.
In its May budget, the Government predicted a surplus of $21.7 billion this financial year. That has now been cut back to a $5.4 billion surplus. The Treasury still expects Australia to record some economic growth — 2 per cent — this financial year, but that too is down from the 2.75 per cent growth they were predicting back in May.
This year’s school leavers are going to find the world a bit tougher than last year’s graduating class did. That’s because an annual economic growth rate of at least 4 per cent is needed to absorb each year’s batch of school leavers into Australia’s work force. So the nation’s unemployment rate, currently at 4.2 per cent, is expected to rise to 5 per cent by the June quarter of next year — and to 5.75 per cent a year later.
Swan told reporters in Canberra quite bluntly that this would happen "as the impacts of the financial crisis flow through". He also suggested that even now we may not have seen the worst of it. "Global economic conditions have changed dramatically in recent months, as the global financial crisis has entered a dangerous new phase," Swan said.
Swan was keen to emphasise the seriousness of the financial crisis, pointing out that more than 30 big financial institutions around the world have now either been bailed out or have collapsed entirely, and that even the world’s leading nations have suffered. "All members of the G7 group of advanced economies have now experienced negative growth at some time during 2008," Swan said.
Despite the huge revenue losses the Government now faces, Swan said he is confident that he can keep his present — and future — budgets in surplus. "However, the budget surplus projections are clearly much lower than forecast at the time of the May budget," he said.
Swan once again spoke of 15 September, the day the big US investment bank, Lehman Brothers, collapsed and "credit markets froze". He clearly wants all Australians to be fully aware of the situation the nation now faces, describing the current economic crisis as the worst the world has faced since the Great Depression of the 1930s.
That economic cataclysm marked people of my parents’ generation for life, and as my late father used to say, "It never really ended until the war". That is, in his view and in that of many others, it took a world war to set the world’s financial system working again.
Could it all happen that way this time?
It shouldn’t. The world learnt much from the Great Depression that is still relevant today. Perhaps the main lesson was that the "beggar my neighbour" policies that were rife during the Depression years don’t work — but that cooperation might.
That’s why the G20 meeting — which Kevin Rudd discussed with George W Bush in an intriguing conversation recently — could be critically important, whether or not Bush actually knows what the G20 is. It is after all an even bigger group of nations than the G7, which was set up primarily to promote cooperation in dangerous times.
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