Aussies get the GST jitters

CANBERRA - This week, as New Zealand braced itself for its first Labour Budget in a decade, the immediate future of our largest and most intimate trading partner was swaying on the arrival of an icon of the Rogernomics years.

With former Prime Minister David Lange still handing out advice on the politics, Australia is about to finally enter the world of "the GST."

A fortnight out, the jitters have well and truly taken over, with fears of a post-GST slump clouding the still-solid underpinnings of an economy that is expected to expand by up to 3.75 per cent over the coming 12 months.

Nudged off track by a series of interest rate rises, the economy was already slowing to what the Reserve Bank considered a healthier and less inflationary pace.

In its forecasts for the Australian Budget just over a month ago, the Treasury predicted low-inflation, job-creating growth of 3.75 per cent in 2000-2001: hardly a sharp braking in national well-being, despite a one-off inflationary blip with GST.

The OECD's view of Australia is even more robust.

Its latest report, issued last month, forecasts growth of 3.9 per cent this year, slowing to 3.7 per cent in 2001, with unemployment falling to 6.4 per cent (it now stands at a decade low of 6.7 per cent) and the current account deficit shrinking from last year's 5.7 per cent of gdp to 4.1 per cent next year.

Though virtually all measures of confidence have taken a pounding, the hard decisions detected in the June survey of industrial trends by Westpac and the Australian Chamber of Commerce and Industry indicate that the gloom may be short-lived.

Westpac general manager economics Bill Evans noted that employment and investment intentions remained resilient - with healthy projections for new orders, output and capital expenditure - indicating firms are not convinced the expected downturn will be sustained.

The Reserve Bank has helped by declining to further lift official interest rates this month, raising hopes that there may now be, at worst, only one more rise this year.

Even farmers are more inclined to optimism.

A National Farmers Federation survey showed more than one-third of them now believe times are getting better, rising to 44 per cent for mixed graziers and 58 per cent of beef specialists.

The exceptions, not surprisingly, are dairy farmers and sugar producers - suffering the triple blows of deregulation, cheaper imports and low world prices.

The downside for the broader economy, influenced in part by GST and higher interest rates, are sudden and sharp slowdowns in housing and retailing, previously mainstays of growth.

Both have been checked - on one hand by the higher cost of borrowing, and on the other by a rush to buy before the imposition of the 10 per cent GST.

The chief economist at Master Builders Australia, Wilhelm Harnisch, said the new-housing market was in free-fall, with concern moving from the immediate impact of interest rates and the GST to an accelerating rate of decline.

On the other hand, the Bureau of Statistics' latest employment figures point to continued underlying strength in the economy.

More than 12,000 jobs were created in May, lifting the rate of job creation to 3.4 per cent, adding an average of 20,000 jobs a month to the workforce for the past six months.

This pace will almost certainly slacken as the slowdown moves back through the economy - Treasury forecasts predict employment growth will slow to 2.25 per cent - but by next June, unemployment is still expected to have reached a 25-year low of 6.25 per cent.

The downside is the inevitability of rising wages and the potential for widespread industrial strife.

The Treasury believes the pace of wages growth will rise from 3 per cent in 1999-2000 to 4.5 per cent - not enough, in its view, to put projected growth at risk.

Unions may think otherwise, with plans for GST-related pay increases and their victory in the Senate over legislation intended to prevent industry-wide bargaining a precursor to what many believe will be a new test of industrial muscle.

Such potential problems aside, the fundamentals look sound. Treasury analysts believe world economic growth will pick up to about 2.5 per cent this year, with improving prospects for the European Union and East Asia, recovery in Latin America and eastern Europe and strong growth in the US, although clouds still hover around Japan.

This is expected to lift Australian exports and help boost investment in plant and equipment, partly offsetting slower growth at home.

Central to this is growth in household consumption, which, after booming along at 3.75 per cent in 1999-2000 and 4.5 per cent the two previous years, is set to slow after the pre-GST rush.

And even this rush may not be all that is expected: big retailers have reported slower-than-expected business from mid-winter sales brought forward to miss GST.

For the moment at least, the economy is trapped in the shadow of the tax phantom.

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Minister's budget statement

Budget speech