Yahoo Finance Is the Aussie economy about to get a cash injection?
There is an old saying that it’s better to be lucky than smart and so it is with the Turnbull government’s budget which appears to be set to get a boost from an unexpected cash windfall via a lift in commodity prices and lower unemployment.
On the latest figuring, the 2019-20 budget deficit was forecast to be just $5.9 billion or 0.3 per cent of GDP. This was framed around nominal GDP growth of 4.25 per cent in 2016-17 and 5 per cent thereafter and an unemployment rate remaining at 5.5 per cent for the next four years.
The various assumptions for iron ore, oil and coal prices are looking unduly pessimistic. The coal price, for example, is almost double the budget time assumption, oil is about 15 per cent higher and iron ore is broadly as assumed. The Australian dollar is a little below the level projected, which is good for the budget bottom line. All of these pieces of good news means that the tax and other revenue flows to Treasury will be higher than was assumed.
Adding to the favourable budget related news is the ongoing solid performance of the economy more generally. Real GDP is exceeding the budget time estimates and there are some hints that inflation has bottomed, both factors that will boost revenue.
In simple terms, this means the budget deficit is likely to be smaller than assumed just a few months ago for this year and this will spread out to forward estimates. Curiously, none of this improvement is to do with any policy changes or reforms from the government – all of it to do with dumb luck on commodity prices.
It is not easy to accurately measure the impact on these better-than-expected economic parameters. Markets are fickle and this recent favourable news could quickly reverse. But as rough rule of thumb suggests that the $5.9 billion deficit in 2019-20 could be completely erased – that’s right, when the Mid Year Economic and Fiscal Outlook is released in the next few months, the budget bottom line for 2019-20 could be in surplus or at least close to it.
Recall that the level of GDP in 2019-20 will be around $2 trillion, with $500 billion of government spending and revenue. If spending is, say, 1 per cent lower and revenue 1 per cent higher, there will be a $10 billion turn in the budget bottom line. That is, the $5.9 billion deficit would be a $4 billion surplus. Such is the fickle nature of the budget estimates.
Also read: Mining tax ideas 'damage WA's reputation'
The government is also getting a little help with the Same Sex Marriage plebiscite blocked, which will save close to $200 million from the budget bottom line.
If the government can look to trim a little spending and work to increase revenue through policy changes, the surplus looks assured. The MYEFO would be a great opportunity for Treasurer Scott Morrison to outline a strategy to lock in a surplus, building on the good luck that seems to be unfolding.
Stephen Koukoulas is a Yahoo7 Finance expert with more than 25 years experience as an economist in government, as Global Head of economic and market research, as Chief Economist for two major banks and as economic advisor to the Prime Minister of Australia.
