$9 billion better off: How the budget bottom line is improving for Australia

Tracey Nearmy/Getty ImagesTreasurer Josh Frydenberg.

  • The Australian federal government’s budget position has dramatically improved, according to the mid-year economic and fiscal outlook released today by Treasurer Josh Frydenberg.
  • The bottom line improves a whopping $9.3 billion this fiscal year, with the projected deficit shrinking to just $5.2 billion from the $14.5 billion expected in the budget. The surplus the following year is expected to be $4.1 billion, compared to $2.2 billion previously expected.
  • Although there are risks to the outlook the economy is expected to rebound a bit next year and wages growth is expected to hit 3.5% in two years’ time and GDP growth is expected to pick up next year.
  • Dwelling investment is now projected to contract sharply by 4% in 2019-20 with as the impact of declining property prices in major cities hits construction activity.
  • The MYEFO document also suggests the Coalition government has decided on — but not yet announced — tax cuts worth billions of dollars.

Australia’s projected federal government budget position has improved by more $9.3 billion over the past seven months, helped by strong commodity prices and better-than-expected job creation.

Treasurer Josh Frydenberg unveiled the mid-year economic and fiscal outlook today, showing the government is now forecasting a $4.1 billion surplus in 2019-20, up from the $2.2 billion forecast in May. The forecast deficit for 2018/19 has also been cut from $14.5 billion to $5.2 billion.

By 2021-22, the MYEFO forecasts the surplus to exceed 1% of GDP. Over the four years from 2018-19, the cumulative underlying cash surplus is expected to be $30.4 billion, nearly double the 2018-19 Budget estimate.

The document also suggests the Coalition government has made decisions on tax cuts worth billions of dollars that are yet to be announced, as you can see highlighted below. They total $9.2 billion over three years — not enough to make them huge tax cuts, but significant nonetheless.

Some of the key risks to the outlook include a further deterioration in trade relations between the US and China, and a failure by China to deal with debt risks in its financial system. MYEFO also predicts a sharp 4% contraction in dwelling investment across the economy in 2019-20 as the property markets in the major cities cool off.

Frydenberg said the results were a “strong demonstration that the Liberal and National Party government’s… plan is working”.

He said one of the proudest achievements has been the creation of 1.1 million new jobs which has seen the unemployment rate fall to a six-year low of 5%.

We’re “on the right track and there is much to look forward to,” he said.

“Having a strong economy is not an end in itself, it’s a means to a better way of life for all Australians”.

Here’s a look at the key projections on the bottom line:

Earlier this month, the national accounts showed economic activity in the September was much weaker than expected. Economic growth of 2.75% is expected this year but the budget assumes real GDP will regather to 3% in 2019.

Part of this will be underpinned, according to the projections, by a rebound in household consumption growth. This has been highlighted by economists and the RBA as a key risk to the economic outlook as property prices decline in the major cities, dragging on household balance sheets. While household consumption growth has been revised down to 2.5% from 2.75% forecast in the budget, it is forecast to increase to 3% next year.

While the numbers may seem small, consumption accounts for well over 55% of GDP so minor adjustments can have a significant impact. The strength in household consumption in the forecasts may also be underpinned by the “not yet announced” revenue measures, presumably tax cuts, contained in the documents.

MYEFO also assumes wages growth will hit 3.5% in 2020-21, a significant improvement from the current level of 2.3%. However, it also assumes the unemployment rate — a key driver of wages growth as lower unemployment tends to lead to higher wages — will remain at 5%, rather than continuing to fall as it has done over the past year.

In the face of declining property prices which have been sharper than expected in Australia’s major cities, there has been a major downward revision to dwelling investment in the government’s forecasts. Dwelling investment is expected to grow by 1% this financial year but then shrink by 4% in 2019-20.

“The forecast decline in 2019-20 reflects the expected unwinding of some of the recent strength in construction activity. Nonetheless, the level of dwelling investment is expected to remain relatively high, reflecting the large stock of work still to be done,” the MYEFO says.

The trade tensions between the US and China are also highlighted as a risk for Australia that is hard to quantify. The document says:

Since the 2018-19 Budget, the United States has imposed tariffs on US$250 billion of Chinese imports and China has retaliated by imposing tariffs on a
range of US-produced imports. Tariffs that have been announced or implemented to date are estimated to affect a little more than 2 per cent of world trade. These measures are expected to have a small negative effect on growth in the United States and China, resulting in a modest downgrade to the forecasts of major trading partner growth.

The extent to which trade protection measures have contributed to a slowdown in global trade growth in 2018 is unclear. However, trade tensions remain a risk to the
global outlook, notwithstanding the recent pause in tariff increases agreed by the United States and China. Additional increases in tariffs would be expected to further weaken growth outcomes. In contrast, a resolution of current disputes could result in faster-than-expected growth, including by reducing uncertainty and boosting investment.

NOW READ: Here’s how the Australian government thinks the economy will perform over the next few years >>

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