Federal Budget Balance
Final Budget outcome: The budget deficit for 2018/19 was $690 million or less than 0.1 per cent of GDP. The budget deficit was a $13.8 billion improvement on the estimate made at the 2018/19 budget and a $3.5 billion improvement on the $4.16 billion deficit forecast just five months ago. The $690 million deficit for 2018/19 compares with a $10,141 million deficit in the 2017/18 year.
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 is effectively balanced. This is hardly a surprise – the deficit for the twelve months to May 2019 was just $148 million – well below the full-year estimate of $4.2 billion made at the time of the April 2019 budget. More Aussies have got jobs, boosting tax revenue. Big Aussie companies continue to make profits (although they have found it harder to lift earnings), further supporting tax revenues. On the other side of the ledger, spending (payments) lifted by 5.6 per cent (3.9 per cent in real terms), the biggest increase in five years. That is appropriate given the economic times but understandable in an election year.
• Looking out, the Government needs to be responsive to the economy’s needs. The important point is to ensure that economic momentum lifts from here. The interest rate cuts, low Aussie dollar, tax offset payments and lift in East Coast capital city home prices should achieve a faster pace of economic growth. If not, the Government may need to look at fresh stimulus measures. A balanced budget in the next year may be more appropriate than producing a big surplus in the current fluky economic times.
• In the next few weeks, monthly budget results will be produced for July and August and the figures should confirm the strong state of the Government’s finances.
What do the figures show?
• The Federal Budget was in deficit by $690 million in the 2018/19 year or less than 0.1 per cent of GDP. Just five months ago, when delivering the 2019/20 Budget, Treasury had estimated a $4.16 billion shortfall. A better-than-expected result was assumed, based on the monthly financial statements released up to May 2019.
• The net operating balance was in surplus by $8.7 billion (0.4 per cent of GDP). The headline deficit for 2018/19 was $7.199 billion (0.4 per cent of GDP), an improvement of $18.7 billion on a year earlier.
• The rolling annual underlying deficit was the smallest in a decade (since January 2009). It was the smallest financial-year deficit in 11 years.
• In terms of economic outcomes and assumption, the Government noted the following:
Real GDP grew by 1.9 per cent in 2018-19, softer than the 3 per cent growth forecast in the 2018-19 Budget following stronger-than-expected growth in 2017-18 of 2.9 per cent. Public final demand and net exports made more substantial contributions to growth than forecast, while growth in household consumption, dwelling investment and business investment was below forecast. Nominal GDP grew by 5.3 per cent in 2018-19, which was significantly stronger than the 2018-19 Budget forecast of 3¾ per cent. This was primarily the result of higher-than-assumed prices for key commodities, which more than offset the softer-than-expected real GDP growth.”
• In terms of movements in receipts and expenses, the Government noted:
“The 2018-19 underlying cash deficit was $0.7 billion, an improvement of $13.8 billion compared with the estimate at the time of the 2018-19 Budget. This improvement was the result of higher total receipts of $11.5 billion and lower total payments of $6.6 billion. Net Future Fund earnings, which are excluded from the underlying cash balance, were $4.3 billion higher than expected at the time of the 2018-19 Budget.”
“Receipts from total individuals and other withholding taxes were $5.7 billion (2.6 per cent) above the 2018-19 Budget estimate. This was driven by stronger-than-expected income tax withholding receipts ($3.0 billion above the 2018-19 Budget estimate), consistent with higher-than-expected employment growth. It was also driven by gross other individuals tax receipts ($1.7 billion above the 2018-19 Budget estimate), reflecting higher-than-expected capital gains and dividend income.”
“Company tax receipts were $4.6 billion (5.1 per cent) above the 2018-19 Budget estimate, consistent with higher-than-expected growth in corporate profits, mainly mining profits.”
“Receipts from superannuation fund taxes were $1.0 billion (9.3 per cent) above the 2018-19 Budget estimate, largely reflecting higher-than-expected outcomes from superannuation funds relating to the 2017-18 income year.”
“Receipts from the GST were $2.3 billion (3.4 per cent) below the 2018-19 Budget estimate, owing to lower-than-expected growth in household consumption and dwelling investment.”
“Total cash payments in 2018-19 were $478.1 billion, $6.6 billion lower than estimated at the time of the 2018-19 Budget. Total payments excluding Future Fund payments were $477.7 billion, $6.4 billion lower than estimated at the time of the 2018-19 Budget.”
There was under-spending on NDIS ($4.6 billion); GST payments to the States ($1.4 billion); DisabilityCare Australia Fund ($1.3 billion); Family Tax Benefit payments ($0.7 billion).
“The outcome also reflects increases in payments across a range of programs including increased payments under Local Government Financial Assistance Grants ($1.3 billion) to support local governments, particularly in areas affected by severe or unexpected weather events, and increased payments under the Pharmaceutical Benefits Scheme ($0.7 billion) largely reflecting new and amended listings on the scheme.
• Government debt stood at $373.566 billion at the end of June 2019 or 19.2 per cent of GDP, almost exactly in line with the estimate made at the time of the 2019/20 budget.
• The Federal Government currently assumes a budget surplus in 2019/20 of $7.1 billion or 0.4 per cent of GDP and net debt of $361.0 billion or 18.0 per cent of GDP. The estimates 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 is in good shape. But the economy has lost momentum. The Government will need to closely watch whether the $7.5 billion tax offset payments – alongside rate cuts – are successful in boosting economic growth. Stronger economic growth is needed to create jobs, lift wages and, in turn, lift prices.
• Commonwealth Bank Group economists expect a rate cut to be delivered in November (or possibly earlier in October) and in February 2020.
Published by Craig James, Chief Economist, CommSec