By Brian Fallow
WELLINGTON - Healthy projected budget surpluses give the Australian Government room to manoeuvre as it negotiates to save its tax reform package.
After independent Senator Brian Harradine, who currently holds the balance of power in Canberra's upper house, set his face against the proposed GST on Friday, the Australian
Government has had to turn to the Democrats who will hold the balance of power after June 30.
Macquarie Bank chief economist Bill Shields said in Wellington yesterday that even without a further selldown of Telstra the underlying fiscal surpluses projected in last week's Budget would increase to about 1.5 per cent of GDP early in the new century.
"Clearly there is ample scope within these figures, which already include the cost of transition to GST, to reach a compromise on tax reform," he said.
"For example the Democrats are demanding that fresh food be excluded from the GST. They estimated that would cost about $3.5 billion.
"The Democrats are also demanding better compensation for lower-income and fixed-income earners, like pensioners. We don't know how much that would add. But clearly there is scope within the surpluses of $5 billion and more to encompass these sorts of compromises, if the Government wants to."
Australian growth is slowing but Mr Shields expects growth in the year ahead to be slightly stronger than the 3 per cent forecast in Peter Costello's Budget.
Market consensus is in the 3.25 to 3.5 per cent range. Such indicators as employment, exports, imports, vehicle registrations and building approvals are all weaker than last year, Mr Shields said.
The exception is retail sales. Consumer spending had held up well, but had outstripped the growth in disposable incomes.
"We don't know when consumers will slow down to match the rate of growth in their spending to the rate of growth in their incomes, but our best guess is the second half of this year."
If growth should fall below 3 per cent, the Reserve Bank of Australia would cut rates again, Mr Shields said. "Why not? there is no threat from inflation. There is no reason to let the domestic economy slide as you are facing this uncertain global outlook. If growth does not fall below 3 per cent we think they will sit on their hands and rates will stay where they are."
The RBA was right to ignore calls last year to "defend the currency" by raising interest rates, Mr Shields said.
"We think the currency is about fair value and therefore not a threat to short term interest rates."
