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Federal Budget: Smallest deficit in a decadeFederal Budget
Final Budget outcome: The budget deficit for 2017/18 was $10.1 billion or 0.6 per cent of GDP. The budget deficit was an $8.1 billion improvement on the $18.2 billion deficit forecast just four months ago and compares with the $29.4 billion deficit projection at the time of the May 2017 budget. The budget data assists in forming a view of the economy and future monetary and fiscal policy decisions.
What does it all mean?
The budget deficit continues to shrink and surpluses are very much in sight. This is hardly a surprise – the deficit for the 12 months to May 2018 was $12.8 billion – well below the full-year estimate of just over $18 billion made at the time of the May 2018 budget. More Aussies have got jobs, boosting tax revenue. Company profits are at record highs, further boosting tax revenues. And on the other side of the ledger, spending was restrained with payments lifting by just 3 per cent.
The Government now needs to stay the course. Strong non-inflationary growth needs to be maintained, lifting employment and driving more people into the job market and off welfare. But discipline needs to be maintained on spending – the challenge being that a Federal Election is looming.
In the next few weeks, monthly budget results will be produced for July and August and the figures should confirm the improving fiscal situation.
What do the figures show?Federal Budget
The Federal Budget was in deficit by $10.1 billion in the 2017/18 year or 0.6 per cent of GDP. Just four months ago, when delivering the 2018/19 Budget, Treasury had estimated an $18.2 billion shortfall. A better-thanexpected result was assumed, based on the monthly financial statements released up to May 2018. The net operating balance was in deficit by $4.0 billion (0.2 per cent of GDP) in 2017/18.
The rolling annual deficit was the smallest in nine years – since the year to March 2009 ($6,563 million). The financial year deficit was the smallest in a decade.
In terms of economic outcomes and assumption, the Government noted the following:
“Real GDP grew by 2.9 per cent in 2017-18, slightly stronger than the 2¾ per cent growth forecast in the 2017-18 Budget. Growth in consumption, non-mining business investment and public final demand was stronger than expected, while the detraction from mining investment was smaller than expected. These positive impacts were partly offset by dwelling investment and net exports which detracted from growth.
Nominal GDP grew by 4.7 per cent in 2017-18, which was significantly stronger than the 2017-18 Budget forecast of 4 per cent. This was the result of the stronger-than-expected real GDP growth and higher-than-assumed prices for key commodities. Labour market conditions were strong with almost 350,000 jobs created in 2017-18. Employment grew by 2.7 per cent through the year to the June quarter 2018, well above the 1½ per cent growth forecast in the 2017-18 Budget. The unemployment rate was 5.4 per cent in the June quarter 2018, lower than the 5¾ per cent forecast in the 2017-18 Budget.”
In terms of movements in receipts and expenses, the Government noted:
“The Final Budget Outcome for 2017-18 was a $19.3 billion improvement compared with the underlying cash deficit estimated at the time of the 2017-18 Budget. Total receipts were $13.4 billion higher than expected and total payments were $6.9 billion lower than expected. Net Future Fund earnings were $1.1 billion higher than expected at the time of the 2017-18 Budget.”
“In net operating terms, the Final Budget Outcome for 2017-18 improved by $15.8 billion compared with the net operating deficit estimated at the time of the 2017-18 Budget, with revenue $11.9 billion higher and expenses $4.0 billion lower than the 2017-18 Budget estimates.”
“Company tax receipts were $6.8 billion (8.7 per cent) above the 2017-18 Budget estimate, consistent with higher-than-expected growth in corporate profits and stronger-than-expected results from ATO compliance activity.”
In terms of payments there was under-spending on NDIS ($2.5 billion); payments to the States $1.3 billion; Age Pension ($894m); Family Tax Benefit ($790m); assistance to people with disabilities ($748m).
Government debt stood at $342 billion at the end of June 2018 or 18.6 per cent of GDP, $13 billion lower than estimated at the time of the 2017/18 budget.
The Federal Government currently assumes a budget deficit in 2018/19 of $14.5 billion or 0.8 per cent of GDP and debt of $349.9 billion or 18.4 per cent of GDP. No doubt the estimates are too high but they will be revised in November/December at the time of the Mid-Year Economic and Fiscal Outlook review.
What is the importance of the economic data?
The Final Budget Outcome is released by Federal Treasury and the Department of Finance late in September each year. The data provides a guide to how spending and taxing policies have performed. The data may have implications for the conduct of monetary policy.
What are the implications for interest rates and investors?
The budget outcome should provide families and businesses with improved confidence about the state of the economy. Certainly ratings agency Standard & Poor’s has greater confidence, last week upgrading the outlook for Australia’s risk rating from ‘negative’ to ‘neutral’. Australia is now a very solid AAA-rated country.
If businesses and consumers have confidence to spend, invest and employ then the economy will have added momentum.
The budget outcome has some influence on monetary policy settings. A smaller deficit is contractionary, taking funds out of the economy so there is a need to maintain the stimulatory monetary policy stance.
With the budget in good shape, the risk is that both Labor and the Coalition will be tempted to crank up the spending promises in an election year.
Published by Craig James, Chief Economist, CommSec