Courtesy of Bloxo at HSBC:
Today’s budget saw the government largely offset downside surprises to its revenue by allowing larger budget deficits over the near term estimates. The budget deficit is expected to be $35.1bn in 2015/16 (2.1% of GDP), a significant slide from a $17bn forecast a year ago and only slightly smaller than the estimated $41.1b deficit for 2014/15. The projected path back to budget surplus, now in 2019/20, is gradual. With limited room to move, the budget had no ‘big ticket’ spending items, but included a childcare package, to support labour market participation, and a tax cut for small businesses. Although the fiscal impulse is still a modest drag on growth over the forecast horizon, it is more accommodative than last year’s budget. Nonetheless, monetary policy is still doing most of the heavy lifting to support local growth.
Facts
– The government projects an underlying budget deficit of $41.1bn (2.6% of GDP) in 2014/15, $35.1bn (2.1% of GDP) in 2015/16 and $25.8bn (1.5% of GDP) in 2016/17.
– Compared with the December mid-year update, the 2014/15 deficit is $760m larger, while the 2015/16 deficit is $3.9bn larger. Due to the significant fall in commodity prices over 2014, the difference compared to the 2014 Budget is starker. The 2014/15 deficit is $11.3bn larger than forecast a year ago, and the 2015/16 deficit is $18.0bn larger.
– Real GDP forecasts have been trimmed for the coming year, with the 2014/15 growth forecast unchanged at 2.5% but 2015/16 growth trimmed to 2.75% from 3.0% previously. The unemployment rate is still expected to peak at 6.5% in 2015/16.
– The 2014/15 forecast for nominal GDP growth is unchanged at 1.5%, but the 2015/16 forecast has been downgraded from 4.5% to 3.25%. By 2016/17, nominal GDP is expected to grow by 5.5%.
– For households, the budget included a ‘families package’, costing $4.5bn over five years, the central policy being a new means-tested Child Care Subsidy from 1 July 2017. Pension eligibility rules for wealthy households will also be tightened.
– There are a range of measures aimed at increasing revenue or reducing expenditure without significantly altering existing policy parameters. For example, increased funding to investigate welfare fraud is expected to yield net savings of $1.5bn over four years, the GST compliance programme is to be extended, the government intends to introduce a ‘Multinational Anti-Avoidance Law’, and there is also a plan to apply GST to products from overseas bought online.
– A $5.5bn jobs and small business package features plans for a 1.5ppt tax cut for small businesses and $331bn to help unemployed youth into the workforce. Small businesses will also get an immediate tax deduction (i.e. accelerated depreciation) on all assets costing up to $20,000 (previously the limit was $1,000).
Implications
The rhetoric surrounding today’s budget is a 180 degree turn from last year’s budget. Unlike last year’s focus on delivering a ‘tight’ budget to help fix Australia’s ‘budget emergency’, this year’s budget had much more positive language, with the Treasurer suggesting it is ‘responsible, measured and fair’. The government is aiming to support growth and confidence.In the short run, this has seen the government allow larger budget deficits in response to the downside surprise to tax revenues. The cumulative budget deficits over the coming three years add to $A75bn, up from $A30bn in the May 2014 budget.
Policymakers realize that they can’t fight the economy and, as always, much of the budget bottom line is dictated by the underlying economic circumstances. Revenues have been $A52bn weaker than expected in last year’s budget, due to falling commodity prices and weaker growth in nominal GDP. With the RBA scrambling to support growth, cutting its cash rate to a fresh record low just last week, it is helpful for the government not to tighten the fiscal screws in response to lower revenues.
However, the government was cautious not to push too far in the other direction. The budget still sets out a plan to get back to budget surplus, although not until 2019/20, which is a year later than in last year’s budget.
To be less of a drag on near-term growth, the consolidation plans are more back-loaded than last year, when growth is forecast to have picked up. Although nominal GDP is forecast to be slower than previously expected in the next year, it is forecast to pick up to 5.5% by 2016/17. To further back-load the budget consolidation, key expenditure plans, such as the government’s childcare spending plans are not due to arrive until 2017/18.
Despite absorbing part of the shock of lower revenues, fiscal policy is, however, not expected to be an outright support for growth. Standard estimates of the fiscal impulse suggest that fiscal policy will be a -0.5ppt drag on GDP growth in 2015/16, a -0.6ppt drag in 2016/17 and a larger drag in the following years.
Net debt is forecast to rise to a peak of 18% of GDP in 2016/17, before it falls. The planned return to surplus and modest debt profile should help to protect Australia’s triple-A sovereign rating.