Video | Agriculture | Confidence | Economy | Energy | Employment | Finance | Media | Property | RBNZ | Science | SOEs | Tax | Technology | Telecoms | Tourism | Transport | Search

 


Australia: Further deterioration of fiscal bottom line

Australian Budget Observer: Further deterioration of fiscal bottom line


Today’s mid-year fiscal update – the first from the new government – showed a further deterioration in the fiscal position, with a deficit of -3.0% of GDP expected for 2013/14 (previously -1.9%). Looser short term fiscal policy will support growth, which is currently running at a below trend pace. New forward projections show no return to surplus (previously 2016/17), on an assumption of ‘no change’ of policy. No new plans for medium-term fiscal consolidation or tax reform were included today, with these expected to arrive with the May 2014 budget. Australia's fiscal position is still not bad, but it should be better.

Facts
- The underlying cash budget deficit is now expected to be -$A47bn (-3.0% of GDP) in 2013/14, versus an August pre-election update (PEFO) estimate of -$A30.1bn (-1.9% of GDP) and a May budget estimate of -$A18bn (-1.1% of GDP).

- For 2014/15, the budget deficit is expected to be -$A33.9bn (-2.1% of GDP), versus an August number of -$A24.0bn (-1.5% of GDP) and a May budget estimate of -$A10.8bn (-0.6% of GDP). Forward estimates show budget deficits cumulating to -$A123bn (versus -$A22bn as at May budget).

- Real GDP growth is expected to be +2.5% in 2013/14 (versus +2.5% in August and +2.75% in May) and +2.5% in 2014/15 (versus +3.0% in August and +2.75% in May). Nominal GDP is expected to grow by +3.5% in 2013/14 and 2014/15 (in August the forecasts were for +3.75% and +4.5%, respectively). The unemployment rate is forecast to rise to 6.25% by mid-2015.

- The forward projections now suggest a budget surplus is not expected on the basis of the government’s ‘no change’ in policy assumption (previously, surpluses were estimated to arrive by 2016/17). At the same time, they committed to making policy adjustment in coming budgets that yield ‘sustainable surpluses that build to at least 1% of GDP by 2023/24’, which is implies policy changes will be announced at the May 2014 budget to plan to achieve this.

Implications
Today’s mid-year update showed further deterioration in the fiscal position. This was the result of a downgrade to expected nominal growth and increased government spending in the near term. Overall, Australia’s fiscal position is not that bad, although it should be much better and plans need to be made to put it onto a more sustainable medium-term footing.

The budget deficit is now expected to be -$A47bn (-3.0% of GDP) in 2013/14, versus a pre-election update estimate of -$A30.1bn (-1.9% of GDP) in August. A significant part of the difference in the budget bottom line reflects the government’s plans not to go ahead with public sector job cuts, worth $A5.2bn, and to a top-up the RBA balance sheet by $A8.8bn, which had previously been run-down in an attempt to shore up the budget bottom line.

Looser fiscal policy in the short run – as a result of today’s budget – will support growth in an economy that is currently growing at a below trend pace. This is prudent, as it would not seem appropriate to aggressively tighten fiscal policy at this point in the cycle. Our fiscal impulse estimates suggest that while fiscal consolidation was a drag on Australian GDP of around -1.6ppts in 2012/13, this financial year the fiscal setting is likely to be supportive to the tune of around +1.4ppts of GDP.

Beyond the near term horizon, the government only included projections based on an assumption of ‘no change’ in policy – they made no new spending or taxation decisions, instead letting the underlying economic outlook drive the fiscal bottom line. On these estimates the budget remains in deficit out as far as 2023/24, where the projections end. This would see gross Commonwealth government debt rise to $A667bn by 2023/24 (26% of GDP) and net debt peak in 2018/19 at 16.2% of GDP, before declining (as growth in the economy will then outpace growth in new net debt).

This can, however, be treated as a scenario as the government also committed to making policy adjustment in coming budgets that yield ‘sustainable surpluses that build to at least 1% of GDP by 2023/24’. Plans for greater medium-term fiscal consolidation are expected to be announced in next year’s May 2014 budget (following an inquiry by the new Commission of Audit). Care will need to be taken to put Australia on a path to medium-term fiscal balance, without unduly tightening policy at a time when growth is still below trend. The significant delay in firming up the government’s medium-term plans could also be somewhat costly, as it leaves households and businesses uncertain about what the government will do.

Overall, Australia’s fiscal accounts are still in reasonable shape, particularly when compared with other countries. Net federal government debt is only 12.1% of GDP in 2013/14 and would be set to peak at 16.2% of GDP in 2018/19, even on the government’s assumptions of no policy change. This is not bad, although it should be better, given Australia’s commodity price boom of recent years.

Bottom line
The government expects larger fiscal deficits in the next two years, as a result of some increase in near term spending and a weaker outlook for nominal GDP growth.

No new plans for medium-term fiscal consolidation or tax reform were included today, with these likely to arrive with the May 2014 budget.

Looser near term fiscal policy will be more supportive of near term growth, leaving the RBA with one less reason to cut rates further.

© Scoop Media

 
 
 
 
 
Business Headlines | Sci-Tech Headlines

 

Scoop Business: Leighton-Led WGP To Build, Manage Transmission Gully

The Wellington Gateway Partnership, led by a unit of ASX-listed Leighton Holdings, has won the $1 billion contract to build the Transmission Gully road north of Wellington. More>>

ALSO:

Gareth Morgan: The Government’s Fresh Water Policy – Revisited

Fresh water quality is the latest area to be in the sights of Gareth Morgan and his research organisation The Morgan Foundation... They found that the fresh water policy was a bit murkier than the Environment Minister let on. More>>

ALSO:

Interest Rates: RBNZ Hikes OCR To 3.5%, ‘Period Of Assessment’ Now Needed

Reserve Bank governor Graeme Wheeler raised the official cash rate as expected, while signalling a pause in rate hikes to assess the impact of moves so far this year. The kiwi dollar sank after Wheeler said its strength was “unjustified” and that the currency could have “a significant fall.” More>>

ALSO:

Fonterra: Canpac Site 'Resize' To Focus More On Paediatrics

Fonterra is looking at realigning its packing operations at Canpac, in the Waikato, to focus more on paediatric nutritionals... The proposed changes could mean around 110 roles may not be required at the site which currently employs 330. More>>

ALSO:

Scoop Business: Postie Plus Brand Gets 2nd Chance With Well-Funded Pepkor

The Postie Plus brand is getting a new lease of life after South Africa’s Pepkor bought the failed retailer’s assets out of administration and said it will use its purchasing power to reduce costs of stock and fatten margins. More>>

ALSO:

Warming: Warming Signs From State Of Climate Report

Climate data from air, land, sea and ice in 2013 'reflect trends of a warming planet' -- says the latest State of the Climate report, launched by U.S. and New Zealand scientists. More>>

ALSO:

Get More From Scoop

 
 
Computer Power Plus

Standards New Zealand

Standards New Zealand
 
 
 
 
 
 
 
 
Business
Search Scoop  
 
 
Powered by Vodafone
NZ independent news