$40 billion hole in the federal budget, services sector slows, shares rise: Economy roundup

Treasurer Wayne Swan has revealed a $40 billion hole in the federal budget because of the global economic crisis.

Treasurer Wayne Swan has revealed a $40 billion hole in the federal budget because of the global economic crisis.

Treasury expects economic growth will slow to 2% in 2008-09, while projected growth for 2009-2010 has been cut to 2.25% from 3%.

As a result of the slowing economy, unemployment is set to rise to 5% by June 2009, and 5.75% in June 2010.

Swan says the budget will remain in surplus this year, although the financial crisis has seen the size of the surplus shrink from $21.7 billion to $5.4 billion.

But the pressure on future budgets is mounting. Swan says revenues will fall by $4.9 billion this year, by $12.2 billion in 2009-10, and by $12.4 billion in 2010-11.

“The global financial crisis has smashed a $40 billion hole in the budget,” Swan told a press conference this morning.

“This is yet another dramatic reminder that we are not immune from the impact of the global financial crisis.”

In yet another sign of the rapid slowdown, the Australian Industry Group’s Performance of Services Index also dropped last month, falling 2.8 points to 42.1, well below the 50-point level which separates expansion from contraction.

AIG chief executive Heather Ridout says the outlook for the services sector is poor.

“Order books were poor right across the services sector, with only communication services recording a mild pick-up following two months of heavy contraction. New orders were particularly weak in the retail trade sector with businesses battening down for a potentially tough Christmas.”

But the Aussie sharemarket has taken a good lead from Wall Street, jumping 2% in early trade. But following the Treasurer’s announcement, the benchmark S&P/ASX200 index has dropped from early gains to be up just 53.5 points or 1.27% to 4268.6 at 11.08am AEST.

The dollar has also rallied by around 4.5% to be at $US69 cents early this morning.

Wall Street also had a good night before the presidential election, with the Dow Jones Industrial Average rising 305.45 points or 3.28% to 9625.28.