The underlying cash budget deficit this financial year will be $1.8 billion worse than the latest official forecasts, according to analysis by Deloitte Access Economics.
However, this will be somewhat offset by a more rapid improvement in the coming financial year, the forecasters say.
Deloitte’s latest budget monitor reports forecasts the 2016-17 cash deficit at $38.3 billion, down $1.8 billion on the MYEFO projections made in December of $36.5 billion.
Part of the problem is spending.
Deloitte says total spending in 2016-17 may be a net $1.2 billion higher than expected in MYEFO. In the next financial year, the difference come in at $840 million higher than expected.
However, a surge in company profits, driven by strong rises in commodity prices, is helping the government’s bottom line.
“Assuming no further policy changes, we project an underlying cash deficit in 2017-18 of $27.5 billion,” Deloitte says.
“Happily, that’s $1.2 billion better than projected in Mid-Year Economic and Fiscal Outlook — but that improvement comes thanks to China and to the Reserve Bank’s interest rate cuts last year, not to decisions taken by a courageous Canberra.”
Company profits, from rising commodity prices driven by demand from China, are behind expected better tax collection.
It was this uplift in commodity income which was behind the IMF’s recent decision to lift forecasts of economic growth in Australia.
In an update last month of the World Economic Outlook report, the IMF put GDP in Australia at 3.1% for 2017, up from 2.5% in 2016, and at 3% for next year.
Deloitte Access Economics says national income is jumping by $100 billion this year, equalling the gains of the previous two-and-a-half years in the one hit.
“And, better still for the budget, the good news is mostly in profits: the most heavily taxed part of our incomes,” says the budget monitor report.
Company profits before income tax rose by 65% during 2016, as this chart shows:
“Not surprisingly, that rocket was powered by mining profits, which went up by more than a factor of six across the same period,” says Deloitte.
“But don’t underestimate the ability of a rising tide to lift all boats. Thanks to a surge late in the year, company profits before income tax outside of the mining sector managed to lift by a more-than-healthy 14% through 2016.”
However, the mid year budget update, MYEFO, has already taken that company profit surge into account.
And Deloitte Access Economics is worried about commodity prices staying high.
“But we remain sceptics on the medium-term, with an eventual return to easing commodity prices weighing on national income in 2018-19 and 2019-20,” says Deloitte.
“Besides, although the news is good on profits, it is poor on both wages and jobs — and so on the core of personal income taxes.”
Wages are running at a record low of 1.87%.
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