Australia has outperformed over the past few years as much of the world suffered at the financial monster that was the Global Financial Crisis.
To ward off a recession the Rudd Government spent $45 billion in various schemes to ward off the bears. It may have worked, but the government can't stop there.
ANZ is expecting a budget deficit of $48 billion in 2009/10. That's $10 billion less than the government estimated earlier in the year – thanks largely to unexpected spending pressure such as delays to school building measures and the prolonged war in Afghanistan.
A deficit of $33 billion is expected next year, $16 billion the year after that before returning to a surplus in 2013/14 – two years earlier than expected. A lot of that money will come from the resources sector which I'll mention later.
But let's deal with what we're expecting to see on Tuesday.
The government's main short-term challenge is to wind back some of last year's aggressive stimulus measures.
Remember those $900 cash hand outs most of us received, and the boost to the first home buyers grant?
As the debate continues over whether they were too much given the strength of the Australian economy, they undoubtedly put upward pressure on interest rates, leaving a very delicate balancing act for the government.
As a side note, Friday's Statement on Monetary measurers clearly shows the RBA remains concerned about inflation, with CommSec confidently predicting the official cash rate to his 5 per cent by the end of the year.
But back to the budget. Reuters expects Wayne Swan to announce budget measurers aimed at families in marginal electorates – it is an election year after all!
He's already signalled tax breaks for savings as well as moves to simplify the tax system. Tax cuts slated to start on July 1st will also be factored into this budget, with the 30 per cent threshold increased from $35,002 to $37,001, and the 38 per cent marginal tax rate to be reduced by one per cent.
In addition to the tax savings, there's also the deferral of the carbon emissions scheme, and reported cuts to pharmaceutical prices along with more details on the recently announced health reforms. Furthermore, ANZ is expecting policies to focus on eduction, infrastructure and possibly housing affordability.
Corporate Australia will be keeping an eye on what the government does with the more complicated nature of government issued paper or bonds.
The Australian government is likely to cut its debt supply target next week, with Su-Lin Ong at RBC expecting $40 billion in new bonds next financial year, down from an estimated $54bn in 2009/10. That may make it harder for our banks to meet tougher safety standards by boosting their holdings of safe-haven assets, like bonds.
ANZ CEO, Mike Smith told Reuters recently, that there's a requirement to hold government securities as liquid assets, but there are not sufficient government securities.
ANZ is also keeping a close eye on any revisions to the government's economic growth forecast. Any upgrade above six per cent could suggest the government is now officially incorporating a commodity 'supercycle' into its forecasts.
Which leads me to my next point … the Resource Super Profits Tax.
What's driving Australia's economy right now are those mining projects, especially in Western Australia and Queensland. If the economy continues to grow above expectations, then it's little wonder the government wants to take their cut, and that's where this new tax comes in.
Given the recently announced recommendations of the Henry Tax Review and the Health Reform Package, two very large commitments, I wouldn't hold my breath for any left-of-field surprises on Tuesday, especially with an election later in the year.
