Slice of good fortune to boost Morrison's Budget

There’s an old saying, that it’s better to be lucky than smart.

As he sits down to put the finishing touches on the 2016-17 Budget to be handed down on 3 May, Treasurer Scott Morrison is enjoying some good luck on the budget numbers.

There are three big-ticket items that, with simple good luck, will likely deliver the government a sizeable chunk of cash to the bottom line without the need for any spending cuts or tax increases.

Important is the iron ore price. Compared with December 2015 Mid Year Economic and Fiscal Outlook, the iron ore price has jumped a spectacular 40 per cent or close to US$20 a tonne.

If it can stay at these levels, which it could well do with the Chinese economy seemingly at a turning point higher, there will be a $4 billion a year narrowing in the budget deficit.

This is a huge windfall gain that any Treasurer would be delighted to see.

The budget is also the time that the Reserve Bank of Australia announces its annual dividend to the government.

There is a rule of thumb that when the Australian dollar rises, the dividend shrinks and when the dollar weakens, the RBA dividend rises.

The Australian dollar at around 76 US cents is well down on the average levels of the past five years when it spent a lot of that time well above US 90 cents.

With the RBA reserves unnecessarily boosted by $8.8 billion by former Treasurer Joe Hockey in 2014, the RBA is swimming in cash.

This should see a dividend payment to the government somewhere in the order of $2 to $3 billion which will come straight off the budget bottom line.

The third bit of budget positive information came last week with news that the unemployment rate had fallen to a two and a half year low of 5.7 per cent.

A stronger labour market is favourable to the budget with lower spending on social welfare payments and higher revenue from income tax collections.

The MYEFO was forecasting the unemployment rate to say around 6 per cent right through to June 2017.

If Treasury update this number by trimming the unemployment rate forecast by 0.25 or even 0.5 percentage points, the impact on the budget could be another couple of billion dollars to the bottom line.

All of a sudden, with these three influences alone, the current projection for the budget deficit of $14 billion in 2018-19 looks way too high and a surplus is within spitting distance.

It must be tempting for Mr Morrison to find some revenue and spending cuts to get the bottom line back into surplus a year or two earlier than was presented in MYEFO.

It should be noted, of course, that the budget figuring has many moving parts and with over $400 billion of spending and revenue, a few little quirks in the same direction in a number of these variables can significantly influence the bottom line.

For now, the luck looks to be firmly on the side of the Treasurer.

If the government has kept a tight reign on spending and is not silly enough to promise company or other tax cuts, Mr Morrison could well present a budget with a tiny deficit or even a surplus within the next couple of years.

 

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.