- The Australian government is predicting larger budget surpluses in the coming years.
- With Australians set to go to the polls next May, economists expect the government will announce some pre-election sweeteners.
- Opinions are mixed as to whether the economic forecasts underpinning the budget are realistic.
Australia’s federal budget position hasn’t been this strong in a decade. And with Australia’s next federal election expected to be held in May 2019, economists expect a raft of pre-election sweeteners to arrive in the months ahead.
“The improved budget outlook provides some scope for the Government to announce somewhat bigger and earlier income tax cuts than already legislated following the budget and other pre-election goodies ahead of next May’s election,” says Shane Oliver, Chief Economist at AMP Capital.
“This looks to have been partly allowed for with the MYEFO putting aside $3 billion in ‘decisions taken, but not yet announced’, but looks to be smaller than we have been allowing for.”
Gareth Aird, Senior Economist at the Commonwealth Bank, is another prominent economist expecting some fiscal easing measures thanks to a stronger budget position than that envisaged just six months ago.
“The decline in the unemployment rate, firmer commodity prices and above-trend economic growth have all played a part in the improvement in the Government’s coffers,” Aird says.
“Heading into an election year, it suggests that the probability of either tax cuts or a mini ‘spending spree’ in next year’s Budget have increased.
“Indeed, the Government has set aside $9.2 billion in the Treasury portfolio over four years under the banner of ‘decisions taken but not yet announced’.”
The government also announced that spending measures may lift expenditure by $1.4 billion over this period.
However, despite the recent improvement in the budget position, Oliver at AMP Capital says the current trajectory for government finances may not be sustained in the coming years.
“The big risk is that revenue growth is weaker than the 7.9% that the Government is projecting for this financial year, and the 5.6% per annum on average projected over the next four years, as slower Chinese growth weighs on commodity prices, jobs growth slows, and wages growth remains weak,” he says.
“In this regard, the Government’s economic projections for 2019-20 of 3% GDP growth, 2.25% inflation and 3% wages growth are a bit on the optimistic side.
“The risks to the growth and wages outlook, along with the prospect for fiscal stimulus next year, suggest that it may not get a lot better than this.”
Marcel Thieliant of Capital Economics is another who says the economy may not perform as strongly as Australia’s Treasury expects.
“We aren’t quite as optimistic about the outlook for nominal GDP growth,” he says.
“While the government expects real GDP growth of close to 3% over the next two years, we think that it will be only 2.5%.”
Despite the potential for pre-election sweeteners being rolled out by the current government, Thieliant says that with already-announced policy measures from the opposition Labor Party, fiscal policy could actually become more restrictive, rather than looser, next year.
“The key point is that Labor is leading the polls for the next federal election and has pledged to do away with a number of tax rebates,” he says.
“That means that fiscal policy may well be tightened by even more than the MYEFO suggests.”
However, while some economists remain sceptical about some of the government’s economic projections, Aird at the Commonwealth Bank describes the forecasts as “reasonable”.
“We consider the near-term commodity price forecasts, which are a key driver of nominal GDP, to be on the conservative side,” he says.
“If the Government’s real GDP forecasts come to fruition then the risks to the revenue side of the ledger look skewed to the upside.”
The government’s updated economic projections can be found here.
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