Australia's budget may be in surplus a year earlier than forecast

Karl Walter/Getty Images for CoachellaBack in the black a year earlier than expected?
  • Only a month after the federal budget was handed down by Treasurer Josh Frydenberg, Australia’s underlying budget position for the current financial year is already running $1.9 billion ahead of forecasts.
  • With prices for iron ore, Australia’s largest export, continuing to soar, UBS says it’s likely Australia’s underlying cash budget balance will be in surplus one year ahead of Treasury forecasts.
  • Treasury is forecasting an underlying cash budget deficit of $4.2 billion for the 2018/19 financial year. It’s been over a decade since the budget was in surplus.
  • The RBA Governor called for the government to help support the economy through a variety of fiscal measures in a speech last week.

Only a month after the federal budget was handed down by Treasurer Josh Frydenberg, Australia’s underlying budget position for the current financial year is already running $1.9 billion ahead of forecasts, according to updated figures for April released by the Treasury Department on Friday.

With iron ore prices, Australia’s largest export in dollar terms, soaring to multi-year highs over the past month, investment bank UBS says it’s now likely the government will deliver its first budget surplus since before the GFC, and one year earlier than initially forecast.

“UBS thinks the recent surge in iron ore prices suggests further improvement is likely in May and June,” said George Tharenou, economist at UBS, in a note released last Friday.

“Hence, an underlying cash surplus looks probable when the Final Budget Outcome for 18/19 is released.”

UBS

According to UBS, the expected return to surplus “would be a significant achievement”, being not only the first in 11 years but also a far stronger starting point for the budget in the financial year ahead.

“The better than expected budget position is a material positive surprise,” Tharenou said, acknowledging the impact of stronger iron ore prices.

“If higher-than-expected iron ore prices were to be sustained, the budget position would likely be $10 billion plus better-than-expected in 19/20.

“Indeed, the better starting point in 18/19 reinforces this view.”

At a time when the Australian economy has slowed sharply, led primarily by weaker household spending and declining residential construction following the downturn in the east coast property market, Tharenou says the expected improvement in budget position could be used by the government to deliver additional fiscal stimulus to help support economic activity in the period ahead.

In a speech last Tuesday in which he flagged the likelihood that official interest rates would likely be cut in the months ahead, most likely in June, Reserve Bank of Australia (RBA) Governor Philip Lowe called on the government to do more to help lower unemployment and support economic activity.

“In the event that the unemployment rate does not move lower with current policy settings, there are a number of options,” Lowe said during his speech to the Economic Society of Australia in Brisbane.

“These include further monetary easing, additional fiscal support, including through spending on infrastructure, and structural policies that support firms expanding, investing and employing people.

“Relying on just one type of policy has limitations, so each of these is worth thinking about.”

Despite Lowe’s plea to the government to consider increased infrastructure investment and productivity-enhancing reforms to help the economy, Treasurer Josh Frydenberg instead put the onus on the Labor Party to back the Coalition’s $158 billion income tax cut package in full.

“It is our first item of business when the Parliament resumes,” Frydenberg said in an interview with the Australian Financial Review (AFR).

“There is an economic impact if they don’t pass our tax package.

“It’s about giving certainty and making the tax system work better for all Australians and that’s what our reforms do.”

Frydenberg said the proposed income tax cuts, to be rolled out in three stages over seven years, “must be supported in its entirety and as a priority” by the Labor Party.

In a rebuttal of the RBA Governor’s call for reform and infrastructure investment beyond what’s already under consideration or legislated, Frydenberg told the AFR that the government has the “right economic plan to see us through these challenging times”.

“Not only are we growing the economy but we are repairing the budget and that’s an important part of our economic plan,” he said.

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