The budget's looking better but the government is cutting back its growth and wages forecasts

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The federal budget deficit is tracking better than forecast but the government expects economic growth to be slightly lower and wages growth subdued.

An underlying cash deficit of $23.6 billion is now expected in 2017-18, an improvement of $5.8 billion compared to the deficit reported at the 2017-18 Budget.

The MYEFO (Mid-Year Economic and Fiscal Outlook) released by Treasurer Scott Morrison today shows the budget on track to return to balance in 2020-21.

Analysts are keenly watching the debt numbers to see whether this leaves room for the Coalition Government to cut personal income tax.

“Our economy is strengthening,” says Morrison.

“Growth and jobs are rising and the better days ahead the government spoke about in the budget are emerging.”

The projected surplus of $10.2 billion in 2020-21 is an improvement of $2.7 billion compared to May’s Budget estimate.

Since the 2017-18 Budget, the underlying cash balance has improved by $9.3 billion over the forward estimates.

The net operating balance is expected to improve from a deficit of $18.2 billion in 2017 18 to a surplus of $6.8 billion in 2019 20 and a surplus of $20.9 billion in 2020 21.

The numbers from MYEFO:

A rise in company profits, and subsequent tax collection, has improved government revenue.

Expected receipts have been revised up by around $3.6 billion in 2017-18 and $2.8 billion over the four years to 2020-21, compared to the estimates in the 2017-18 Budget.

This is largely driven by higher forecasts for company tax due to stronger-than-expected collections, increased company profitability and ATO enforcement activity.

Wages

However, a lower forecast for wages is expected to weigh on personal income tax receipts.

The MYEFO papers say wage growth is low by historical standards in both the public and private sectors and has been more subdued than expected since the May budget.

The Wage Price Index is forecast to grow by 2.25% through the year to the June quarter 2018 and 2.75% in the 12 months to the June quarter 2019.

This is a 0.25 of a percentage point lower in both years compared with budget. Wage growth is forecast to lift as the economy strengthens, inflation picks up and excess capacity in the labour market is reduced.

Growth in consumer prices also remains subdued, with the Consumer Price Index increasing by 1.8% in the year to the September quarter 2017.

MYEFO says heightened competition in the retail sector and subdued rental price growth are expected to contain inflation.

Morrison says the Australian economy is expected to grow at a solid pace in 2017-18.

Non-mining business investment has been increasing, while the drag on growth from falling mining investment has been diminishing and has nearly run its course.

Labour market conditions have strengthened, with more than 360,000 jobs at a rate of 1,000 jobs a day having been created in 2017. Growth in household consumption has been modest and inflation and wage growth remain subdued.

“Our growth story remains a compelling one, and although real GDP growth has been slightly tempered in 2017-18, the trajectory is upward,” says Morrison.

Real GDP is forecast to grow by 2.5% in 2017-18, slightly below the budget forecast of 2.75%. In line with the budget, real GDP is forecast to grow at 3% in 2018 19.

Nominal GDP is forecast to grow by 3.5% in 2017-18 and 4% in 2018-19 as the terms of trade retrace following strength in 2017-18.

The 2017-18 forecast is lower compared with budget, largely reflecting recent subdued outcomes for wage growth and domestic prices. Commodity prices remain a key uncertainty to the outlook for the terms of trade and nominal GDP.

The government confirmed $2.1 billion in cuts to higher education via a freeze on Commonwealth Grant Scheme funding from January 2018 for bachelor degree courses.

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