As has been the case in recent years, the Government’s economic forecasts are conservative and appropriate. There are no material changes from the mid year update last December, and the forecasts for the next two years are very similar those the RBA presented just last Friday in the Statement on Monetary Policy.
The only real difference to the RBA’s numbers is the Government’s unemployment rate forecast remains unchanged at 5.25% through to 2020/21 while the RBA raised its forecast for the next two years to 5.5%. The government is also a little more optimistic on inflation. This, however, is not a big deal and no game changer for the underlying Budget numbers.
The economy is expected to maintain its record expansion over the projection period with real economic growth of 3% right through the projection period (2020/21).
Inflation is forecast to rise to 2.5% while wage growth is expected to pick up to 3.25% in 2019/20 and 3.5% in 2020/21. There will be some questioning of the wage price index forecasts as was the case last year, but it seems plausible to me.
All the international numbers are reasonable and not all that different from the consensus view or the IMF’s numbers.
With no real change to the economic forecast, how has the government been able to deliver a whole series of new measures as well as tax cuts?
As flagged in the Treasurer’s speech two weeks ago, the Treasury has been gifted an extra $8 billion of revenues this financial year that it had not planned on receiving. This has reset the revenue base and provided the financial kitty to make these new commitments in a pre-election gift to the Government.
The extra $8 billion of unexpected revenues in 2017/18 will become $10 billion in 2018/19 and $8 billion in 2019/20. This is the foundation stone of this budget and the personal income tax cuts the Government is promising.
The big question is whether this revenue surprise will be sustained. The Budget papers tell us that personal income tax revenues have been the biggest driver of this windfall with company tax receipts a distant second. Only time will tell but any disappointment on revenues will hurt the Budget bottom line directly.
With this in mind the Government hasn’t spent all the new revenues. Some of the extra money has been directed to Budget repair and as a result we will get a wafer thin surplus a year ahead of schedule in 2019/20.
At $2.2 billion, this surplus could be wiped out in the blink of an eye. But a surplus it is, and it shows a commitment to good financial management.
My first read on the economic impacts of this budget — i.e. the stance of fiscal policy — is that it is mildly stimulatory compared to where we were before. Although the budget position is better than previously expected, this is all due to better revenues rather than spending cuts, and there are a whole range of off-budget investment initiatives that will provide a boost to economic activity over the next few years.
A strong Budget that showed a clear commitment to good financial management despite the temptation of a pre-election splurge.
Warren Hogan is a Sydney-based economist and consultant. He has previously held roles as a senior official in the federal Treasury and as chief economist at ANZ Bank.