Time for Mid Year Economic Optimism (MYEFO)

Advertisement

Yes, it’s that time of year again – MYEFO (Mid Year Economic Optimism). And if it seems to have come around especially quickly this time around, that’s because it has! No prizes for guessing why. The longer the Government waits, the worse it will get. The current drop in our trade performance to a monthly deficit of $2 billion is about halfway to what’s coming, around $3 billion by my calculations. Shadow Finance Minister, Andrew Robb, is right therefore, when he writes today in the AFR that:

By firing the MYEFO gun now, the government could conveniently avoid having to report the full size of the hole in mining tax revenue. It has $3 billion booked for this year and $13.4 billion over the forward estimates, money it has spent already. The first payments, or lack thereof, may not have been through by the time MYEFO was printed.

Might as well get in ahead of that!

Advertisement

As we know, of course, the recent history of Budget forecasts has been pretty poor, and always to the downside. Last year’s MYEFO offered the following:

The downward revision to the economic outlook from Budget has reduced tax receipts by over $20 billion over the forward estimates. Lower employment growth since Budget is impacting on taxes on wages and salaries, and volatile financial markets are affecting equity prices and hence capital gains receipts.

Replace the capital gains story with the commodities story and you could rerun the press release this time around, according to today’s well placed leaks:

Even without the full details of actual mining tax collections being included, the budget review is expected to reveal a further deterioration in the government’s revenue collections, particularly for corporate and resources taxes, amounting to $20 billion over the next four years.

Advertisement

So, what are the leaks telling us today? Over the weekend there were many rumours and private studies suggesting a Budget hole well over $10 billion for this year alone. And there are more today. My view is that these are probably exaggerated. The iron ore rebound, if it lasts (and I expect it will in the medium term) has reduced the terms of trade fall significantly, by my calculations from around 13% to 7-8%.

Add in the rescheduling tricks and the following is believable:

A federal budget update to be released on Monday will reveal an unchanged forecast for unemployment of 5.5 per cent, despite a slowing world economy, and spending cuts and increased taxes worth more than $4 billion this year to keep Labor’s budget surplus pledge.

…Speculation about savings and tax measures to be included in Monday’s outlook statement suggest the government has largely resisted massive cuts to programs.

It will include a move to close a loophole that allows some employees to use salary sacrificing to get ­taxpayer funded discounts for items such as theatre tickets and V8 supercar tickets.

There is also speculation about increases to visa charges, minor changes to superannuation tax arrangements, and a reshuffle of ­foreign aid funding.

The unemployment forecast is optimistic by a couple of points but just as important will be the terms of trade and growth assumptions. Because iron ore has rebounded, the Government will not have to face up to the full lows of the recent crash but growth is going to be hit harder because the knock-on effect was to end the capex boom. The 2013/14 Budget is going to be a shocker in my view.

Advertisement

Anyway, with the mining boom peak in sight, the Government is certainly right to not be foisting bald-faced austerity onto the economy:

Treasurer Wayne Swan said on Sunday the spending cuts and revenue measures in Monday’s budget update would aim to minimise the impact on the economy. Government tax receipts were down “tens of billions of dollars every year compared with where we expected them to be before the global financial crisis struck”.

But the assumptions will be the key and I have every confidence that they will again be rosy enough to set up another round of $20 billion in cuts this time next year.

Advertisement
About the author
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.