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Tough year, but per capita income at new highs

Tax refunds up $5 billion over year
National Accounts; Monthly Budget Statement

Rich Australia: Real GDP per capita rose by 0.3 per cent to a record high of $74,873 in 2018/19. Both national wealth (net worth) and household wealth were at record highs at the end of June 2019.

Budget deficit: The Federal Budget was in deficit by $4,018 million in the 12 months to September. Tax refunds totalled $20 billion over the past three months, around $5 billion higher than a year ago.

The annual ‘National Accounts’ publication provides more detailed estimates of economic performance and may provide guidance on the interest rate outlook.The monthly budget statement shows taxing and spending effects on the economy.

What does it all mean?

• It was a tough year. The global economy slowed due to trade wars and Brexit. At home, home prices fell and income growth dried up. But despite all this, real income per person (real GDP per capita) stood at record highs at the end of June. This measure accounts for population growth and accounts for prices. And despite all that has occurred, real income per person has never been higher.

• In addition, national wealth and household wealth was at record highs at the end of June.

• Wage growth is modest – but is it actually quite appropriate. Productivity fell 0.2 per cent over the past year but prices rose by around 1.5 per cent. Overall this suggests that wages should be growing by a little less than 1.5 per cent a year. However productivity is low because there was a surge in jobs over the past year. The new workers take time to be fully productive. But nevertheless it is always important to note that wage increases are based on both price and productivity trends.

• The budget is only modestly in deficit – and the main reason is because tax refunds are flowing, boosting household incomes. Refunds total $20 billion for the past three months and they are running $1 billion higher than where the government’s accountants thought it would be. Now the question is what people do with them.
What do the figures show?

Key points from Annual National Accounts 2018/19

• The Australian economy grew by 1.9 per cent in 2018/19, below the 2.9 per cent growth a year earlier (decade average 2.6 per cent).

• The Bureau of Statistics (ABS) notes: “In 2018/19, the largest industries in the Australian economy were Mining, Financial and Insurance Services, Construction and Health Care and Social Assistance, representing over 30 per cent of the economy. The Mining industry continued to expand, recording its 15th consecutive annual growth reflecting Oil and Gas Extraction’s transition into production.”

• In 2018/19 the industries with the largest share of current price gross value added (at basic prices) were Mining (10.2 per cent), Financial and Insurance Services (9.3 per cent) and Construction (8.0 per cent).

• “Australia’s labour productivity fell by 0.2 per cent in 2018/19, recording the first fall since 2010/11, the decline in labour productivity was broad based, with 10 out of 19 industries recording falls.”

• “On an hours worked basis, market sector multifactor productivity (MFP) fell 0.4 per cent in 2018–19, the first decline since 2010-11. Market sector gross value added of 1.3 per cent was the slowest output growth ever recorded for the market sector.”

• Real GDP per capita rose by 0.3 per cent to a record high of $74,873.

• National net worth rose by 0.1 per cent in nominal terms to record highs of $11.9 trillion. Wealth rose 1.7 per cent in real terms to a record high of $12.2 trillion.

• Household net worth increased by $47.7 billion or 0.5 per cent to a record high of $10.5 trillion.

• Household final consumption expenditure recorded growth of 1.9 per cent in chain volume terms in 2018/19. Spending on essential items continued to grow modestly, while discretionary spending slowed.

• The household saving ratio fell to 3.0 in 2018/19, the lowest annual saving rate in eleven years. The fall in household net saving can be attributed to the subdued rise in household final consumption expenditure outpacing soft growth in gross disposable income. Gross disposable income was impacted by a substantial increase in income tax payable.

• The nominal contribution of mining commodity exports has overtaken the contribution of exports of all other goods and services relative to GDP for the first time in history.

• Dwelling rent rose only 2.0 per cent last year – the slowest growth in 25 years.

Monthly Budget Statements

• In the twelve months to September 2019, the Budget deficit stood at $4,018 million. Over the same 12-month period to September, the fiscal balance was in deficit by $1933 million with the net operating balance in surplus by $5,202 million.

• Smoothed revenues (twelve months to September) were up 8.1 per cent on a year ago – the slowest growth in 16 months. Smoothed expenses were up by 5.3 per cent (strongest growth in 52 months).

• Annual company tax collections are up 5.9 per cent over the year after recording double-digit annual results over 2017/18 and 2018/19. Net individual tax is up 3.6 per cent. But tax refunds are up 16.7 per cent on a year ago.

• In terms of expenses, health spending is up 14.6 per cent while public debt interest is actually down 1.7 per cent.

• The Department of Finance noted: “The net operating balance for the year to 30 September 2019 was a deficit of $15,209 million, which is $2,681 million higher than the 2019-20 Budget profile deficit of $12,528 million. The difference results from lower than expected revenue and higher expenses.”

• In terms of the underlying cash balance, “The underlying cash balance for the financial year to 30 September 2019 was a deficit of $13,853 million, which is $119 million lower (better) than the 2019-20 Budget profile deficit of $13,972 million.”

Receipts: “Total receipts were $627 million higher than the 2019/20 Budget profile.”

Payments: “Total payments were $444 higher than the 2019/20 Budget profile.”

• Federal Treasury and the Department of Finance currently expect an underlying surplus of $7,054 million for 2019/20.

• In terms of the fiscal balance the Department of Finance noted: “The fiscal balance for the year to 30 September 2019 was a deficit of $14,650 million, which is $928 million higher than the 2019-20 Budget profile deficit of $13,721 million. The difference results from lower than expected revenue, higher expenses and lower net capital investment.”

• Receipts from the Goods and Services Tax stood at $66,330 million in the twelve months to September, broadly flat on a year ago and down from the record $67,574 million in receipts for the year to December 2018.

• Actual GST receipts for the three months to September stood at $15,969 million, just below the Budget ‘profile’ of $16,052 million.

What is the importance of the economic data?

• The Australian Bureau of Statistics releases an annual publication “National Accounts” that provides updated and new perspectives on Australia’s economic performance.

• The Department of Finance releases the Government Financial Statements (Niemeyer Statement) almost every month. The statement allows investors to track the current Budget position and provides insights into the effectiveness of fiscal policy.
What are the implications for interest rates and investors?

• The latest data ‘wraps up’ the performance of the economy over the past financial year. Broadly, slow wage growth and falling home prices caused consumers to trim savings in order to keep spending. The slowdown in income and wealth meant that consumers were more cautious about spending, leading to slower growth of the broader economy. Employment soared, depressing productivity.

• Today’s data is now ancient history. But it is clear that the route to higher income growth is increased productivity.

• The tax refunds are flowing. Government spending is growing at the fastest pace in four years. But the experience from retailers so far is mixed with some noting higher spending such as JB Hi-Fi. Increased spending would serve to keep interest rate settings on hold.

Published by Craig James, Chief Economist, CommSec