• Westpac expects the underlying budget deficit for 2016/17 which will be announced by the Federal Government on Budget night, May 3, will be $29bn. That is a near $5bn upgrade from the Government’s December forecast, published in the Mid-Year Economic and Fiscal Outlook (MYEFO). Across the four years to 2018/19, the improvement is $17bn.
• The economic environment is somewhat more favourable than anticipated. Real output growth has surprised to the high side in 2015/16. Commodity prices have also surprised, bouncing off historic lows, driving an upgrade of the terms of trade forecasts. In 2016/17 the terms of trade is set to swing from a major negative for national income to a small positive. Partially offsetting this: the currency has moved up from its lows; and general inflation pressures have weakened.
• On the Government’s forecasts for real GDP growth we expect just the one change, a 0.25% upgrade for 2015/16. That yields a profile of: 3.0%, 2.75%, 3.0% and 3.0%. The forecast for nominal GDP growth is upgraded by 0.25% in both 2015/16 and 2016/17 but downgraded by 0.25% in 2017/18, giving a profile of: 3.0%, 4.75%, 4.75% and 5.25%. • The iron ore price is expected to be revised higher from US$39/t fob in MYEFO to US$50/t (fob) for 2016/17 and US$46/t (fob) beyond that. This adds an estimated $7.8bn over the 3 years to 2018/19.
• The budget impact from the improved economic backdrop, together with prospects for the 2015/16 deficit to be $1bn smaller than expected on lower expenditures, is $4.5bn in 2016/17 and $3bn a year thereafter, we estimate. • We anticipate that the balance of new policy measures, including the drawing down of the contingency reserve, as occurred in the May 2015 Budget, will be neutral for the budget in 2016/17 and improve the budget position by $2bn in 2017/18, increasing to a $5bn contribution in 2018/19.
• The 2016 Budget is to focus on competition, innovation, investment and infrastructure. There will be tax cuts to boost investment and activity, as occurred in the 2015 Budget, funded by revenue integrity measures. A new infrastructure delivery agency is to be created, with private sector involvement. Any potential impact of the new infrastructure agency on government borrowing is unclear and has not been incorporated in our figuring. • The budget returns to balance in 2019/20, which now rolls into the four year forward estimate period. That is one year earlier than expected in MYEFO.
• Net debt peaks at 17.9% of GDP in 2017/18, which is below the 18.5% peak forecast in MYEFO. In dollar terms, net debt climbs to $330bn in 2018/19, some $17bn below that in MYEFO.
If that’s what we get then the MB knives will be out…full report.
The Treasurer is hosing expectations down at the AFR:
Advertisement
Small and medium business will be biggest winners in Tuesday’s federal budget because they are the main drivers of growth in Australia’s economy, Treasurer Scott Morrison says.
His comments all but confirm earlier speculation that the budget will contain measures similar to last year’s $20,000 instant asset write-off for small business. That scheme could be expanded and extended beyond its expiry date of June 30, 2017, or be augmented by other similar measures.
…He also indicated that the economic growth outlook that he significantly downgraded in December’s budget update would remain relatively subdued. In his last budget in 2015, Joe Hockey included growth projections of 3.5 per cent for 2017-18 and 2018-19.
In December, Mr Morrison downgraded these to 3 per cent for each year and lowered the expectation for 2016-17 from 3.25 per cent to 2.75 per cent.
“I took a very conscious decision to try and end this process by where they have 3.5 per cent growth projections,” he said.
“I just said ‘No, I don’t believe it’.”
He said there would be “some movement” in the growth forecasts since December but they would be slight. Nor should anybody expect “wild variations” in revenue predictions since December, indicating a long road back to surplus. He rejected suggestions by some that he should simply hike the overall tax burden to hasten the return to surplus, saying the “conditions are too sensitive” and that would damage the economy.
Scott Morrison has put a surprise “economic dividend” at the heart of the federal budget to assure Australians his plan will deliver a boost to growth from tax cuts and a $5 billion building plan for major projects across the country.
The budget will outline the economic gains from personal and company tax cuts using detailed Treasury analysis of the new jobs and the increase in gross domestic product that will flow from the changes.
The Treasurer told The Australian that the infrastructure plan would also lift growth by pouring $2.2bn into NSW and $2.4bn into Victoria for road and rail projects, with support for transport plans in other states and territories.
Queensland will get money for the Ipswich Motorway, countering a Labor funding promise made days ago, while there will be new funds for South Australia and $750 million for Western Australia.
The Victorian funding will help develop the Melbourne Metro Tunnel and Murray Basin Rail projects, while the NSW projects include the Sydney Metro and the Parramatta Light Rail, all funded from the Asset Recycling Scheme set up to finance state work.
“Certainly what we plan to announce on Tuesday night we know will result in an increase to GDP over the longer term,” Mr Morrison told The Australian.
“Treasury have been able to put a figure on that. Now that is just in relation to measures on tax.
“That would just be the starting point of the economic dividend of what we announce in the budget. It only relates to one element. There is infrastructure, defence, the national innovation and science agenda — all of this adds to that again.”
Malcolm Turnbull emphasised the scale of the budget tax changes last night, telling Sky News there would be “substantial” reform, adding: “We are not fiddling.”
Advertisement
The infrastructure is welcome though is un-audited as usual which will guarantee that any economic dividend is smaller than it should be. We’ll have to wait and see tomorrow but I do not have a good feeling about an already overly bullish set of forecasts discovering a surprise “growth dividend”.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
