Will the Coalition’s budget cuts push the economy into recession? > Check the facts

Will the Coalition’s budget cuts push the economy into recession? > Check the facts

Who: “Most of all, I fear an Australian economy which through Mr Abbott’s massive cuts would risk triggering the economy into recession with huge hits on jobs and huge hits on growth,” Prime Minister Kevin Rudd

The claim: That the cuts the opposition is proposing could trigger a recession in Australia.

The facts: According to the ABS the Australian economy grew by $42.3 billion last year.

According to Treasury in the Pre-Election Economic and Fiscal Outlook (PEFO) the Australian economy is expected to grow 2.5 per cent in 2013-14. If it did then the economy would grow by $37.4 billion.

The Coalition has announced that it will save $6 billion more than it will spend over the forward estimates; this includes $1.1 billion in 2013-14.

The finding: Expected growth in 2013-14 is $37.4 billion with the Coalition claiming the net impact of its budget changes will be a reduction of $1.1 billion. This reduction in spending is not large enough to drive the economy into recession.

Discussion of evidence: While the Coalition is planning changes to the budget including cuts of $42 billion, it is also planning to inject some of that money back into the economy in the form of tax cuts and increases in spending. It’s the net position that is most relevant to the impact on the economy. On a cash basis in 2013-14 the Coalition will take $1.1 billion out of the economy and this is not nearly enough to drive the economy into recession since the economy is expected to grow by $37.4 billion.

The reduction in spending will be subject to a multiplier effect but these are very difficult to predict and will not be large enough to turn $1.1 billion decrease into $37.4 billion decrease.

Changing government spending and taxing could also have an effect on the economy. Government spending tends to have a stronger economic growth effect than cutting taxes. If a government cuts spending and uses that money to cut taxes, as the Coalition is planning to do this may have a small negative effect on the economy. This negative effect will be larger if the spending cuts are used to cut corporate taxes. This is because there is a stronger leakage overseas when corporate taxes are cut. Corporate tax cuts are likely to increase business profit some of which will flow overseas in the form of dividends to the foreign owners of those businesses.

Even accounting for these effects the cuts proposed by the Coalition are not large enough to drive the Australian economy into recession.

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