Reaching goal of surplus depends on tax revival and stimulus from China

THE government will get a clear idea in the next six weeks whether its return to budget surplus this year is feasible.

THE government will get a clear idea in the next six weeks whether its return to budget surplus this year is feasible.

The flow of tax revenue and the health of the Chinese economy and its effect on commodity prices are the most important variables that could knock the budget off course. "It is never spending that makes or breaks a budget; it is always tax," Deloitte Access Economics director Chris Richardson said yesterday.

The government has not released any monthly updates of its financial position, revealing the actual flow of tax income, since July, when it put out the figures for May. Treasury had access to the June, July and August figures when compiling this week's update, and they should be released soon, most likely at the end of this week. By early December it should have released the figures to this month.

Although the monthly tax figures vary widely, the size of the required revenue revival, with the total to rise by 11.4 per cent, or $38 billion, means the trends should be evident by this month's financial statements. They should also clarify if Treasury estimates about the inflow of the minerals resource rent tax reflect the actual payments by mining companies.

The budget update assumes prices for iron ore and coal gain ground from their current levels. Treasury says the falls of recent months are the result of China's steel industry running down its stocks and this will have ended in a few months.

Treasury's position is consistent with the Bureau of Resources and Energy Economics, whose executive director, Quentin Grafton, has argued that iron ore prices will gain ground, although not to the previous peak of $US148 a tonne.

Market prices for key commodities and data releases from China on trade, investment and industrial production will indicate if the outlook for Australia's resource industry has stabilised.

"By the end of the year, you'll have a sense of whether stimulus in China is underpinning a mild recovery in their demand and also a better sense of where Europe may be heading, although there will still be considerable uncertainty about the globe," Barclays' Kieran Davies said.

Domestic indicators, including the monthly trade and labour force reports from the Australian Bureau of Statistics, will shed light on whether Australia's economy is matching expectations. The most important clue will be provided by the September quarter's national accounts, due for release on December 5.

These will show whether the nominal GDP -- the measure of the value of output -- is growing at the 4.2 per cent pace required to deliver the budget surplus.