Australia Markets close in 4 hrs 49 mins

Here's what we could expect for the 2018 Federal Budget


Treasurer Scott Morrison is about to do cartwheels down the corridors of Parliament House, such is the unexpected improvement in the budget position over the past year.

A surprise surge in company tax collections, a lift in goods and services tax receipts and an undershoot in planned government spending has seen the forecast for the budget deficit for the first seven months of 2017-18 come in more than $6 billion lower than was assumed when the Mid-Year Economic and Fiscal Outlook was released in December.

Also read: Why February is finance month

If this trend continues through to the end of the financial year, the budget deficit could fall to around $15 billion which would be the smallest deficit in the current cycle, that is, since the last budget surplus was recorded in 2007-08 and all of the improvement will have been driven by a surge in tax receipts.

More importantly, the improved budget momentum will almost certainly parlay through to the so-called out-years of the budget which will leave to smaller deficits and larger surpluses.

While there is always plenty of debate about the economic parameters underpinning the budget forecasts over the 3 or 4 years of the forward estimates, when Morrison hands down the budget on 8 May, he is likely to announce that budget position over the four years has markedly improved.

Included in the budget will be news that the 2018-19 deficit will be revised down from $20 billion to under $10 billion and in 2019-20, a surplus will be forecast.

Also read: Turnbull touts tax cuts for middle-income earners and big business in 2018

Importantly, the 2020-21 surplus, currently estimated to be around $10 billion, could be revised as high as $15 billion or even more on the basis of no policy change as the company tax and other revenue floods in.

It is at this point where politics will likely trump economics.

After more than a decade of continuous budget deficits, which will have totalled close to $400 billion, economic policy conservatism would argue for the government to lock in decent sized surpluses for at least to few years before offering to blow the windfall gain. Surpluses, albeit only moderate ones, would allow the level of debt to be trimmed and with that, government debt interest payments could be reduced in what looks like an environment of rising global interest rates.

With the government trailing badly in the polls and the Federal election scheduled for the next year or so, there seems little chance this conservatism being followed.

It is more likely that on budget night, Mr Morrison will hand down a budget that will be designed to win votes with the proverbial offering of a fist full of dollars.

Also read: How falling property prices could affect Australian bank stocks

Get set for a budget night which includes announcements of income tax cuts and spending targeted to a range of marginal seats.

The message will be “we are delivering a budget surplus and giving tax cuts”.

For some, it will no doubt sound impressive.

It is likely to see the government claw back some electoral support, at least in the short term. It will be interesting to see whether the policy ‘sugar hit’ will works on enough members of the electorate who have heard it all before.

Or whether, even they do actually want to see larges surpluses and cuts to government debt, rather than what will be just a few dollars more in their pay packets.