Record budget deficit; Record Chinese imports
Final Budget outcome; Preliminary trade
Federal Budget deficit: The federal budget was in deficit by a record $85.3 billion or 4.3 per cent of GDP over the past year (2019/20). The deficit was down by $0.5 billion since the previous Economic and Fiscal update in July (JEFU). But the deficit has deteriorated by $90.3 billion since the Mid-Year Economic and Fiscal update last December (MYEFO).
Government debt: In 2019/20, net debt increased to $491.2 billion (up $3 billion from the JEFU estimate) or 24.8 per cent of GDP, and gross debt increased to $684.3 billion or 34.4 per cent of GDP.
Preliminary foreign trade: In original terms, the value of exports of goods fell by 2.1 per cent to $28.3 billion in August to be 16.4 per cent lower than a year ago. The value of goods imported was down 6.9 per cent to $24 billion and 7.2 per cent lower when compared to a year ago. In the year to August the goods trade surplus (exports less imports) was $71.2 billion, down from the record high of $87 billion in April.
China trade: Australia’s annual exports to China fell from $148.08 billion in July to $146.13 billion in August. Exports are up 2.4 per cent on a year ago. Imports from China lifted from $81.84 billion in July to a record $82.45 billion in August. Annual imports were up by 5.6 per cent on a year ago. Australia’s rolling annual trade surplus with China fell to a 13-month low of $63.68 billion in August.
The trade data gives guidance on future spending (imports) and industry income/profitability (exports). The budget update includes the latest Government economic forecasts, assisting company financial planning and strategy.
What does it all mean?
• The pandemic has hammered the federal budget’s bottom line. Over the past financial year (2019/20), the budget was in deficit by a record $85.3 billion. Government payments to support Aussies through the virus recession and health crisis surged by $57.7 billion between December’s Mid-Year Economic Update (MYEFO) estimates and today’s final budget outcome. Why? Well, $35 billion was spent on the wage subsidy program JobKeeper, a further $13.1 billion on the $750 Coronavirus Supplement and an additional $7.1 billion on health-related costs.
• Of course, the other by-product of the recession is higher unemployment and lower company profits. Company tax receipts plunged $13.4 billion, individual and withholding taxes fell by $9 billion and GST receipts were $5.3 billion below MYEFO estimates in the final ‘wash up’ for 2019/20.
• The size of Australia’s budget deficit and foreign debt are enough to make one’s toes curl. But the spending was necessary. A targeted fiscal spending spree – focused on keeping Aussies in jobs and small businesses alive – was needed to aid Aussies through the worst economic downturn since at least World War II, if not the Great Depression. It has come at a huge financial cost to the government and taxpayer, but the cost of inaction would have been dire with double-digit unemployment and an even weaker starting point for an economic recovery.
• Higher debt levels will eventually be paid back over time. Fortunately, Australia’s public debt burden (net debt 23 per cent of GDP in 2019) was low relative to our global peers going into the crisis – allowing the government to boost the incomes of Aussie households and businesses through the downturn.
• Even after the lift in debt this year and next, Australia’s debt burden will remain low by comparison with other advanced nations. And the interest cost of debt remains low as the government can borrow for 10 years at less than 1 per cent per annum! In other words, the economic return of the increase in debt will exceed interest costs.
• The trade surplus appears to have peaked for now. And exports to China are past their highs. Despite escalating trade tensions with our largest trading partner – which has culminated in an array of Chinese tariffs, anti-dumping measures and port restrictions on barley and wine, beef – Aussie exports to China lifted in August. And Aussie imports from China are at record highs on a rolling annual basis at $82.45 billion. Sounds a bit like a lover’s tiff doesn’t it?
What do the reports and figures show?
Final Budget Outcome 2019/20
• Today the Federal Government released its Final Budget Outcome for 2019/20. Details are as follows:
• Budget bottom line: The underlying cash balance was in deficit by a record $85.3 billion or 4.3 per cent of GDP over the past year (2019/20), down by $0.5 billion since the previous Economic and Fiscal update in July (JEFU). But the deficit has deteriorated by $90.3 billion since the Mid-Year Economic and Fiscal update last December (MYEFO) when Treasurer Josh Frydenberg forecast a budget surplus of $5 billion or 0.3 per cent of GDP. The net operating balance was in deficit by $92.3 billion (4.7 per cent of GDP).
• Debt: In 2019/20, net debt increased to $491.2 billion (up $3 billion from the JEFU estimate) or 24.8 per cent of GDP, which was $98.9 billion higher than the 2019/20 MYEFO estimate. Gross debt increased to $684.3 billion (34.4 per cent of GDP).
• Payments: Since the 2019/20 JEFU estimate, total payments have decreased by $3 billion in 2019/20 to $549.6 billion. But payments are $57.7 billion higher than estimated in the 2019/20 MYEFO.
• Coronavirus-related stimulus/payments led to the deterioration in the Budget bottom line. Payments included,
$35 billion in JobKeeper payments;
Increased payments ($750 Coronavirus Supplement) to the unemployed, pensioners, carers and students of $13.1 billion;
Funding to the states and territories to diagnose and treat patients ($2.9 billion);
The purchase of personal protective equipment and other items ($2.1 billion) under the Health Protection and Emergency Response;
Additional payments under the National Disability Insurance Scheme ($2.1 billion);
Bushfire response payments via Australian Government Disaster Financial Support Payments to the states and territories ($1 billion);
Lower spending on road and rail infrastructure due to the pandemic and bushfires (down $1.7 billion).
• Receipts: In the Final Budget Outcome, total revenue was $486.3 billion in 2019/20; $24.9 billion lower than estimated at the time of the 2019/20 MYEFO. Total cash receipts were $469.4 billion, $33.1 billion lower than estimated at MYEFO.
• Tax receipts totalled $447.5 billion in 2019/20; $25.3 billion lower than estimated at MYEFO. Why?
GST was $5.3 billion below the MYEFO forecast on a receipts basis and $1.9 billion below forecast on a revenue basis;
Total individual and other withholding taxes was $9 billion down on the MYEFO receipts forecast – due to payment deferrals granted as a result of the impact of COVID-19 on taxpayers;
Company tax was down $13.4 billion from the MYEFO forecast on a receipts basis and $12 billion below estimates on a revenue basis due to lower provisions for credit amendments to company tax returns.
Preliminary international trade – August
• According to the Bureau of Statistics (ABS), in original terms, the value of exports of goods stood at $28.3 billion in August, down 2.1 per cent in the month. The value of exports are down 16.4 per cent from a year ago.
• The value of goods imported totalled $24 billion in August, down 6.9 per cent in the month to be down 7.2 per cent on a year ago.
• In the year to August the goods trade surplus (exports less imports) was $71.2 billion, down from the record high of $87 billion in April.
According to the ABS:
• “The decline in August 2020 was driven by non-monetary gold (excluding gold coin), down $2,270m (-64 per cent) off the back of a record high value in July 2020.
• Other declines in August include gas, down $307m (-12 per cent). The value of exports of gas have consistently fallen since March 2020, driven by a drop in price; and textile fibres, down $62m (-30 per cent).
• Partially offsetting these declines was an increase in exports of metalliferous ores, up $996m (9 per cent) with increases to a number of Asian countries signalling a rebound in their manufacturing and construction industries; and petroleum, up $305m (52 per cent).
• Year-on-year, exports in August 2020 declined $5,545m (-16 per cent) compared to August 2019. This was primarily driven by falls in gas, down $2,374m (-52 per cent); coal, which has been declining since mid-2019, down $1,914m (-36 per cent); and non-monetary gold (excluding gold coin), down $764m (-37 per cent). Over the same period, exports of metalliferous ores were up $646m (6 per cent).
• From July to August 2020 exports to China increased by $54m to $11,888m. While the overall increase was small, larger increases were recorded in exports of metalliferous ores, up $181m (2 per cent) and non-ferrous metals, up $135m (67 per cent). Offsetting these increases were declines in coal, down $259m (-29 per cent), and textile fibres, down $53m (-32 per cent).”
According to the ABS:
• “The decline was driven in part by a large decrease in imports of transport equipment, down $389m (-55 per cent) following the import of several aircraft in July 2020, as well as a decrease in office and ADP machines, down $278m (-24 per cent).
• Other large declines occurred in imports of electrical machinery, down $212m (-12 per cent), and non-monetary gold, down $163m (-15 per cent).
• Imports of textile yarn, fabrics and related products, which includes commodities associated with personal protective equipment (PPE) such as facemasks, also declined from the record high in July, down $57m (-8 per cent) to $679m in August 2020. Despite the monthly decline, the August import value is the second highest value on record.
• Partially offsetting the overall decline in August 2020, imports of road vehicles increased by $339m (14 per cent). Despite this being the third consecutive monthly increase, year-on-year the August 2020 road vehicle imports are still down $379m or 12 per cent.
• Year-on-year imports of goods in August 2020 declined by $1,859m (-7 per cent) on August 2019 due largely to a significant decline in petroleum imports, down $1,538m (-46 per cent).
• From July to August 2020 imports from China decreased, down $1,007m (-13 per cent) to $6,647m, with declines across a broad range of commodities, however the major drivers included: Office and ADP machines, down $203m (-27 per cent); Electrical machinery, down $158m (-19 per cent); and Telecommunications equipment down, $131m (-16 per cent). Other notable declines occurred in textile yarns, fabrics and related products and articles of apparel, both of which include personal protective equipment (PPE), down $79m (-14 per cent) and $60m (-9 per cent) respectively.”
Preliminary trade with China
• Australia’s annual exports to China fell from $148.08 billion in July to $146.13 billion in August. Exports to China are up 2.4 per cent on a year ago.
• Australia’s annual imports from China lifted from $81.84 billion in July to a record $82.45 billion in August. Annual imports were up by 5.6 per cent on a year ago.
• Australia’s rolling annual trade surplus with China fell from $66.23 billion in July to a 13-month low of $63.68 billion in August.
What is the importance of the economic data?
• The Federal Budget has been delayed due the virus crisis. The Budget was to be handed down in May but is now scheduled for October 6. In the interim the Government has delivered a budget update. The data shows the state of government finances.
• The monthly International Trade in Goods and Services release from the Bureau of Statistics provides estimates on exports and imports of physical goods (such as coal, beef and computers) and services (such as travel receipts). The balance of goods and services (BOGS) is a narrower description of Australia’s external position than the current account estimates. The import data is a useful gauge of consumer and business spending while exports reflect global demand as well as domestic influences such as drought.
What are the implications for investors?
• The world is awash with deficits and debt courtesy of the Global Financial Crisis and Great Lockdown Recession. Australia is no exception. Federal Treasurer Josh Frydenberg has the unenviable task of delivering what is expected to the largest estimated budget deficit in history on October 6. In July, the government forecast a deficit of $184.5 billion for 2020/21 or 9.7 per cent of GDP.
• The Reserve Bank Governor has implored governments to deliver a further $40 billion worth of stimulus to boost economic growth and get the jobless rate down. On budget night – while many of you are enjoying your holidays – an array of spending measures are expected to be delivered, including personal income tax cuts, a business investment allowance tax break, a potential wage subsidy ‘successor’ to JobKeeper, infrastructure investment and skills and training programs.
• With Melbourne’s second lockdown taking its tragic toll, income and company tax receipts will also be lower-than-estimated in JEFU and MYEFO. So it appears that the budget deficit for 2020/21 is likely to be in excess of $200 billion, but as high as $250 billion, if recent Australian Office of Financial Management (AOFM) government bond issuance programs are any guide. And net debt appears set to blow out over the coming years with the word “trillion” – something we normally associate with huge US deficits and debt numbers – a real possibility in Australia. Nevertheless, this situation has got the Modern Monetary Theorists jumping in their chairs with inflation remaining low. But before we get ahead of ourselves, perhaps it’s about time that policymakers see the current fiscal malaise as an opportunity to re-set the economic reform agenda?
Published by Ryan Felsman, Senior Economist, CommSec