Australia: Budget position to improve from a deficit to a small surplus - Westpac

Analysts at Westpac points out that the Australian Government forecasts the budget position to improve from a deficit of 2.1% of GDP in the 2016/17 financial year to a small surplus of 0.4% of GDP in 2020/21.

Key Quotes

“Revenues are projected to lift by 2.2% of GDP over the four years, to 25.4% of GDP, and expenses are expected to inch lower by 0.1% of GDP over this period, to 25.0% of GDP. The budget consolidates by 0.5% of GDP in each of the four years, with the exception of 2019/20, when the budget improves by 1.0%. The accelerated consolidation in 2019/20 occurs as revenue initiatives make a more material contribution. The timing of a return to budget surplus in 2020/21 is unchanged from the previous forecast profile.”

“The economic outlook underpinning this fiscal profile is a relatively positive one. Real GDP growth is at trend or above across the forecast horizon and the terms of trade is not expected to have a substantially impact upon nominal GDP growth during this period.”

“In the 2016/17 financial year, the budget deficit is estimated to be $37.6bn (2.1% of GDP). That is a $1.1bn deterioration on the December mid-year budget update (MYEFO). Policy decisions increase spending by $1.5bn, only partially offset by a $0.3bn improvement due to parameter variations.”

“For the coming financial year, 2017/18, the budget deficit is forecast to be $29.4bn (1.6% of GDP), representing a slight $0.7bn deterioration on MYEFO. Again, policy decisions are key to the deterioration, with a net impact of $2.3bn. A net increase in spending of $4.2bn (relative to the MYEFO profile) outweighs a net $1.9bn increase in revenue. Parameter variations support the budget to the tune of $1.6bn, cushioning the impact of policy decisions. A marginally more favourable near-term economic outlook is a plus for the budget, with nominal GDP growth upgraded to 4.0% from 3.75% in MYEFO.”

“Across the following three years, the budget position improves from a deficit of $21.4bn in 2018/19 (1.1% of GDP) to a deficit of only $2.5bn (0.1% of GDP) in 2019/20 and then edges into surplus in 2020/21, $7.4bn (0.4% of GDP). In the final two years of the forward estimates, the budget position has improved relative to MYEFO by $7.5bn and $6.3bn, respectively. Central to the upgrade is a boost from new revenue initiatives, contributing a net $7.0bn and $8.5bn for these two years. Key measures include a medicare levy and a tax on banks.”

“Across the four years to 2020/21, the budget position has improved by $11.4bn, reflecting the combined impact of net new savings of $6.3bn (comprising $20.8bn in higher revenue against $14.5bn in additional spending) and parameter variations of $5.2bn. Revenue is $13.5bn higher across the period, while expenditures are $2.1bn higher. See below for a discussion of key new policies.”

“The Commonwealth Government's net debt position remains manageable. Net debt lifts from an estimated 18.6% of GDP ($325bn) in 2016/17 to a peak of 19.8% of GDP ($375bn) in 2018/19. By 2020/21, net debt is forecast to be $366bn, 17.6% of GDP. Net interest payments are steady at 0.7% of GDP across the forecast period, at $13.4bn in 2017/18.”

“Gross debt is $501bn (28.6% of GDP), in 2016/17, rising to $606bn (29.2% of GDP) in 2020/21, with interest paid at 0.9% of GDP each year.”

“Risks to the fiscal projections are twofold. First, that the economic outlook is too optimistic. Second, that revenues fail to increase as a share of the economy at the rate expected. Post the GFC the revenue share has remained stuck around 23.5% and the last time revenue hit 25% was in 2009/10.”