The Australian Government’s Mid-Year Economic and Fiscal Outlook (MYEFO) was released today, revealing that Australia’s underlying cash deficit is now expected to stand at $23.6 billion for 2017/18, some $5.8 billion lower than the level forecast in May.
Expected government revenues were revised up by $3.6 billion, driven by higher forecasts for company tax, with stronger-than-expected collections, increased company profitability, and ATO enforcement activity, contributing to the budget’s expected improvement.
Longer-term, the government still sees the budget returning to the black in 2020/21, forecasting a surplus of $10.2 billion, well above the $2.7 billion level forecast in the May budget.
While there has been little reaction in Australian financial markets to the MYEFO release given recent trends in monthly receipts and expenditure data, let’s see what economists have made of the government’s latest fiscal assessment.
Are its newly-minted fiscal and economic forecasts realistic, or will the the trend of over-promising and under-delivering — seen so often in the post-GFC era — reassert itself once again?
Let’s find out.
Martin Petch, Moody’s Investors Services
Overall, the modest changes in Australia’s fiscal and economic outlook maintain a credit-positive commitment to returning the budget to a surplus in fiscal 2021.
Moody’s continues to see risks that fiscal deficits will be wider for longer than the government projects. This reflects our expectation for more subdued nominal GDP growth than over the past decade, a consequent dampening of revenue generation and a testing climate for spending restraint. The mild reduction in the expected profile for wages growth embodied in the forecasts remains a concern.
From a slightly narrower deficit than in the budget, the government envisages a return to a path very close to what was budgeted. The fiscal gains from somewhat higher commodity prices will not be retained. At the same time, the government shows fiscal prudence in not basing the mid-year update on an assumption that commodity prices will continue to rise.
Since the 2017-18 Budget, policy decisions, after taking account of Senate positions, have resulted in a modest $573 million improvement in the underlying cash balance over the forward estimates. Parameter and other variations have resulted in a $2.4 billion increase in forecast receipts and a $8.8 billion decrease in payments over the forward estimates.
Nonetheless, Australia’s moderate debt burden gives the government flexibility to continue to manage the current transition from resource investment-led output to a broader-based economic structure. Moody’s forecasts that gross debt of the general government will be 42.4% of GDP in 2017-18.
John Peters, Commonwealth Bank
The recent “winks and nudges” from the national capital hinted at a further improvement in the MYEFO Budget figuring on the back of upgraded company profitability and tax receipts, and despite very tepid wages growth. And that expectation is exactly what Treasurer Morrison delivered earlier today.
Cumulative deficits for the next four years are now forecast to be $9.3 billion lower than expected at the time of the May Budget. Over 60%, or $5.8 billion, of this improvement is slated to occur in the current fiscal year.
In the arcane realm of fiscal policy, and given the vicissitudes and complexity of making spending and revenue forecasts over a span of years, the projected improvement in the fiscal position is not all that substantial. But it is undoubtedly heading in the right direction. And this fact should keep the rating agencies onside for now anyway.
Overall, the fiscal projections look quite conservative and reasonable. A key risk will be a failure of wages growth to pick up to around 3.5% in the out years, on the back of a continuing improvement in the labour market.
Any failure for a pickup in broad wages growth, to the projected 3.5% per annum, would jeopardise personal tax revenue projections and make the achievement of the budget’s fiscal improvement track towards surplus that much more problematic.
Andrew Hanlan and Bill Evans, Westpac
The improved budget position is driven by revisions to the forecasts, providing a boost of $11.2 billion, with revenues $2.4 billion higher and expenses undershooting by $8.8 billion.
Higher company tax returns and better than expected superannuation tax receipts more than offset the impact of slower wages growth and softer economic growth in 2017/18.
As to risks around the real GDP growth forecasts, Westpac is a little more optimistic for 2017/18 at 2.75%, but expects the economy to slow down in 2018/19 to 2.5%, some 0.5% below the government and 0.75% below the RBA’s forecasts. Downside risks are centred on consumer spending and home building activity.
On wages growth, the government still expects this to accelerate across the forecast period, albeit with the profile lowered by 0.25% each year to reflect the weaker starting position. The risk is that even this revised profile is too optimistic given ongoing structural headwinds.
Paul Bloxham, HSBC
After many years where the mid-year fiscal update has disappointed, relative to the May budget, today’s result was a resoundingly positive one. With more revenue and less spending than expected the government is projecting narrower budget deficits and a peak in gross debt that is $23 billion lower than previously expected.
Australia’s budget deficit, which peaked at 4.2% of GDP in 2009/10 and was still 3.0% of GDP in 2013/14, is expected to be 1.3% of GDP this year, which is better than the 1.6% of GDP expected in the May budget. From here, the government continues to expect narrowing budget deficits and a return to surplus by 2020/21. As a result of the upside surprise, net debt is expected to peak at a lower level than previously — 19.2% of GDP versus 19.8% of GDP.
The lift in commodity prices from their trough levels of early 2016 are playing a key role in improving the budget bottom line, through their effect on nominal GDP and the tax take. The global economic upswing is also helping as it feeds through to improved business conditions and a lift in local hiring and investment.
A key assumption in the projections, and a source of much debate, is that wages growth will pick-up as the economy improves. The forecasts for wages growth have been nudged a little lower in the short run, but wages growth is expected to pick-up from its current 2% rate to over 3% year-on-year by 2019/20.
Much like the government’s forecasts, we too expect that real and nominal GDP growth will lift over the forecast horizon and that a tightening labour market will deliver a pick-up in wages growth.
Su-Lin Ong, RBC Capital Markets
Despite the better starting point, the Government’s forecast back to surplus remains a little optimistic and reliant upon continued strong and synchronised global growth. We remain cautious on the outlook for activity given the headwinds to households with the softening in the key housing sector set to be an added challenge in 2018. We also remain of the view that wages/unit labour cost growth is likely to stay structurally lower reflecting a number of common global factors plus the additional challenge that Australia needs to be more competitive on this front.
We would expect some fiscal slippage to emerge in the 2018-19 Commonwealth Budget next May which may well be a pre-election Budget amid a government that is likely to remain under some pressure.
For now, however, markets are likely to welcome today’s news and focus less on the medium term challenges. Net debt is now expected to peak at 19.2% in 2018-19 rather than 19.8% and outstanding CGS [Commonwealth Government Securities] for 2017-18 are expected to be $6 billion lower.
Paul Dales, Capital Economics
Only a bit of the improvement is due to more favourable economic assumptions. The projection for the coking coal price was nudged up but, in the main, Morrison became more cautious. Due to weaker consumption growth (2.25% versus 2.75% in the Budget) more than offsetting stronger business investment (2% vs. 0%), the forecast for real GDP growth in 2017/18 was revised down to 2.5% from 2.75%. And weaker wage growth, 2.25% versus 2.5%, meant that nominal GDP growth was cut to 3.5% from 4.0%.
Instead, the bulk of the better fiscal figures was due to a smaller structural budget deficit (the part not influenced by the economy). This is because the Treasurer more than offset the hit from previous policy decisions being rejected by the Senate (i.e. the $2.5bn cut in higher education funding) with new cost saving decisions on education and welfare for newly arrived migrants. This is important as it is the changes in the structural balance that highlight the influence of fiscal policy on GDP growth. The fiscal squeeze is now expected to be 0.7% of GDP bigger in 2017/18, but 0.7% smaller in 2018/19.
So in that sense, Scott Morrison today decided to give the Treasury’s fiscal coffers an early Christmas present, with the donor being the economy. That said, we believe the Treasurer will soon repay the favour as the government has been dropping some fairly heavy hints that it intends to reduce personal income taxes, perhaps as soon as in the Budget in May. In that sense, the fiscal tinkering announced in today’s budget should be seen as the Treasurer laying the foundations for a big tax cut closer to the next election.
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