Budget deficit: $40 billion smaller than forecast

Monthly budget statement

What happened: Over the full twelve months to April the budget deficit was $177.1 billion or 8.9 per cent of GDP. The budget deficit peaked in February and has fallen $26.5 billion in two months.

Implications: The economy is in better shape than expected around six months ago and therefore so is the Budget. This gives the Government options to provide more assistance to individuals and businesses. And that is important given the latest virus outbreak in Victoria.

The monthly Budget figures can provide insights on the broader economy and policy settings. If fiscal settings are tight, the Reserve Bank may allow easier monetary settings.

What does it all mean?

• According to the Federal Government bean counters, the budget deficit is running just under $40 billion below where they expected it to be back in December. So far, the Government has spent around $15 billion less than expected. In addition, Government receipts are around $23.5 billion higher than expected. As a result the Federal Government has scope to provide further assistance to consumers and business as needed.

• The improvement in the budget will give investors added confidence that the economic strategy applied by the federal government and Reserve Bank is working.

• The improvement in the budget – especially company and personal tax revenues – means that the government has options to help out regions or industry sectors as required. Regions include Victoria as well as North Queensland – the latter impacted by the absence of overseas tourists. Sectors that could get additional support are tourism, higher education and sectors or businesses that are impacted by skilled labour shortages such as home building and agriculture.

• Rolling annual company tax revenues are at 14-month highs, pointing to higher business revenues and profits and providing justification for the current record levels for the sharemarket.

• The servicing cost of the budget is starting to lift with the rolling annual total of public debt interest payments at 5-month highs. Still the servicing cost remains very manageable.

What do you need to know?

In the full twelve months to April 2021, the Budget deficit stood at $177.1 billion (8.9 per cent of GDP), down from the peak of $203.6 billion in the year to February. At the Mid-Year review last December, the underlying cash balance for the full year (2020/21) was expected to be a deficit of $197.7 billion (9.9 per cent of GDP). That total was revised down in the May budget to $161 billion. So the budget deficit has peaked and is on track to the new target.

• Rolling annual company tax revenues totalled $93.2 billion for the year to April, the highest level in four months and are on track to the record high of $95.2 billion in the year to January 2020.

• Receipts from the Goods and Services Tax stood at $66.6 billion in the 12 months to April, not far from the record $67.8 billion in the twelve months to April 2020. GST receipts are down 1.8 per cent on the year (full year receipts are forecast at $65.75 billion).

• Actual GST receipts for the 10 months to April stood at $59.5 million, $5.1 billion above the Budget ‘profile’ of $54.4 billion.

Published by Craig James, Chief Economist, CommSec