AUSTRALIA'S economic recovery will not begin until the end of next year or the start of 2011 at the earliest, the federal budget will forecast.
Under a change in methodology forced by the volatile economic circumstances, the budget on May 12 will attempt to make more accurate predictions of financial circumstances for the next two years, rather than assume a normal return to trend growth in the second year as is usually the case.
The changes are contained in a letter by the Treasurer, Wayne Swan, to his state counterparts, along with an explanatory document by the Treasury Secretary, Ken Henry.
"While the economy is expected to be recovering in 2010-11, we expect year average growth to remain below trend in that year," Dr Henry says. "The standard assumption of trend would therefore tend to overstate the fiscal position in that year."
Mr Swan says the orthodox approach of a budget assuming a return to normal trend growth in the second year out "would provide a misleading picture of the economy and budget position over the forward estimates period".
Consequently, the budget will forecast a gloomy economic picture for next financial year as well as the year after, 2010-11.
It will forecast a recovery beginning in 2010-11 but not until at least the middle of that period.
Trend economic growth, about 3 per cent, will not be reached until the end of the financial year, after which it will be projected to grow at above trend.
Typically, a budget contains economic forecasts for the financial year in which it is released, and for the next year.
Predictions for the subsequent years are based on projections that assume a return to trend growth.
In a speech to the Business Council of Australia today, the shadow treasurer, Joe Hockey, will dismiss assurances by Labor that it will be able to return the budget to surplus in future years.
The Government has promised that once trend growth returns, spending increases will be capped at 2 per cent and all tax revenues will be used to eradicate debt.
Mr Hockey will argue that Labor is too heavily committed to spending to abide by the cap. He will list all its promises made before the global recession, including health and education reforms, and increased pensions. But pension rises will be more narrow than originally promised. It is now certain that single aged pensioners will receive the biggest increase of all pensioners.
Originally, the Government planned to increase the payments to aged singles and couples, as well as veterans, carers and disability support pensioners.
It is no longer deemed affordable to give all groups the requested $30-a-week rise as this would cost the budget an extra $3.86 billion a year.
The Prime Minister, Kevin Rudd, has signalled that to help pay for the pension increases, those earning more than $150,000 will be subject to means testing of middle-class welfare benefits, as well as possible superannuation tax increases.
Richard Gilbert, the chief executive of the Investment and Financial Services Association, said the Government risked damaging confidence in super, which was already doing it hard.
