Aussie Govt Has Extra A$3.7b For Election Campaign

Australian government found extra A$3.7 billion for election campaign

Australia's Treasurer, Peter Costello, today announced that Australia's budget outcome for the year ended June 2007 was unexpectedly large, at an underlying cash surplus of A$17.3 billion (1.7% of GDP). This is substantially higher than the A$13.6 billion surplus estimated back at budget time in May.

For the fifth straight year, therefore, the government substantially under-estimated the size of the final budget outcome. Today's announcement means the Government 'suddenly' has an extra A$3.7 billion to spend during the upcoming election campaign.

Given that today's Newspoll shows the government still trailing far behind the Labor opposition, the Government is unlikely to be shy in announcing carefully-targeted fiscal largesse as the election nears.

The government immediately will transfer A$7 billion of the accumulated surplus to the Future Fund, which sets aside funds to meet expected public sector pension liabilities, and will add another A$1 billion to the Higher Education Endowment Fund. The Government also plans to establish a Health and Medical Investment fund with an initial injection of A$2.5 billion. This still leaves available, however, a generous pool of funds to be utilised during the election campaign.

The Treasurer indicated that around A$2 billion of the additional cash came from lower than budgeted spending. In particular, welfare payments were lower owing to the robust economy. The remaining A$1.7 billion of the additional cash came from unexpectedly high tax receipts.

Of this, most came from higher company tax receipts. Pension fund tax receipts also were higher than anticipated, owing to unexpectedly healthy realised gains from superannuation funds.

An even larger loosening of fiscal policy in coming months will keep RBA officials on their toes for signs that the fiscal boost is triggering additional inflation pressure. Already, the RBA forecasts core inflation at 3% for the year ended June 2008 - at the top of the RBA's 2-3% target range - so RBA officials' tolerance for imprudent loosening of fiscal policy will be limited.

RBA officials have indicated that small changes in the Budget balance are not material in deciding the direction of monetary policy but, with the economy already bumping up against capacity constraints and inflation pressure building, the economy is hardly in need of further stimulus.

Our forecast is that the RBA will raise the cash rate again in December, even though our US macro team now forecasts 25bp Fed eases in September and October.

ENDS

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