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Australian Gov't: Updated Budgets, Macro Forecasts

The Treasurer, Wayne Swan, today released the Federal Government's updated fiscal and economic forecasts in the keenly-awaited Mid-Year Economic and Fiscal Outlook (MYEFO) document. The Treasury now forecasts that the economy's GDP growth rate will be higher than previously forecast and that the jobless rate will be significantly lower. On the fiscal aggregates, today's statement projects smaller budget deficits from 2010-11 and a peak in public sector net debt that will be A$50 billion lower than the Budget projection.

None of these "revelations" comes as a major surprise - it had become obvious in recent months that the outlook for the economy and the Government's fiscal position was substantially better than was expected when the Treasurer delivered the Budget back in May. It does seem odd, though, that despite better economic growth forecasts and a lower projected peak in the unemployment rate, the Budget deficit forecast for the current fiscal year is unchanged at nearly A$58 billion (4.7% of GDP). The MYEFO document explains this apparent anomoly by indicating that it will take time for stronger activity to be fully reflected in higher taxation receipts.

(To view graphs mentioned in this article please visit the following link:

The release of the MYEFO statement today coincides with the first conclusive evidence that the Government has started winding back the fiscal stimulus aggressively pumped into the economy since last October. Over the weekend, belatedly, the Government announced a new price cap on houses eligible for the first home owners' grant (from 1 January), and there was a scaling back of the A$4 billion home insulation program. The Reserve Bank started winding back it's emergency policy settings last month - and will take a further step along this path tomorrow - so it had become untenable for the Government not to follow suit. In our view, there will be a further recalibration of the Government's fiscal settings in coming months.

On the economy, the Treasury now projects GDP growth in 2009-10 of 1.5%, up significantly from the 0.5% contraction in the economy projected at the time of the Budget. The official forecast for the peak in the unemployment rate now is substantially lower at 6.75% (in the June quarter of 2010); the Budget forecast was for a peak of 8.5%. The Treasury forecasts GDP growth of 2.75% in 2010-11, followed by 4% expansions in subsequent years (0.5% lower than the Budget forecasts). J.P. Morgan's GDP growth forecasts are higher than the Government's in the near term, but broadly similar in the out-years. Our projected peak in the jobless rate is slightly higher at 7%, but also occurs in mid-2010.

On the fiscal aggregates, the statement today projects a Budget deficit of A$57.7 billion for 2009-10 (4.7% of GDP), virtually unchanged from the A$57.6 billion deficit projected in the Budget. For 2010-11, though, the deficit now is projected at A$46.6 billion (3.6% of GDP), down from the A$57.1 billion projection in the Budget. The subsequent deficits are lower by similar amounts. Our Budget deficit forecasts are slightly lower than the Government's, based partly on our projections of better GDP growth in the near term.

The Treasury now predicts that the peak in Government net debt will be A$135.5 billion (9.4% of GDP) in 2012-13; previously, the Government's forecast was that net public debt would peak at just over A$188 billion (13.6% of GDP). Based on the Government's projections, our fixed income strategist estimates that ACGB supply will be about A$185 billion in mid-2013; this is down from the A$225 billion projected at the time of the Budget.


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