The ANZ has produced an excellent Budget preview document that is quite easy to follow and instructive. It’s conclusions are as follows:
ANZ forecasts the Commonwealth budget to be in deficit by around AUD17bn in 2012-13 and around AUD7bn in 2013-14 when it is released at 7:30pm AEST on May 14. These deficits are small relative to GDP at around 1% and ½% respectively but do represent a deterioration from the small surpluses projected in the October mid-year update.
Small budget deficits are expected until 2014-15. The return to surplus that may occur in 2015-16 will require a modest further tightening of fiscal policy supporting the view that expansionary monetary policy will remain appropriate for some time. An earlier return to surplus is very difficult without a notable tightening of discretionary fiscal policy or an AUD decline that outpaces the decline in commodity prices. This is not ANZ’s expectation, however, as we see the AUD remaining elevated for some time.
Net debt is expected to rise only slightly, to a peak of around AUD176bn or an average of around 10.5% of GDP over the coming four years. Further increases in net debt from budget deficits will be partially offset by a low interest burden on this debt, in line with continued low global interest rates.
Whilst disappointing, these weaker budget outcomes should not affect Australia’s coveted AAA (stable) credit rating. The Government and
Opposition are both committed to conservative fiscal policy1. The budget balance is likely to continue to improve and debt levels are low by international standards ensuring the Government retains budget flexibility to react to negative shocks. If there were a change in the Government’s fiscal strategy to achieve budget surpluses on average over the medium-term, this would not be looked upon favourably by rating agencies. This, however, is unlikely.There are three principles by which we will judge the 2013-14 budget:
First, is this an appropriate fiscal setting for the current economic cycle? A further modest tightening of fiscal policy is arguably not inappropriate if Australia is near a peak in the unemployment rate (ie. nearing the beginning of a cyclical non-mining upturn). Fiscal contraction is less appropriate if the labour market outlook worsens and/or downside risks to the non-mining economy rise.
Second, do the fiscal settings presented provide a credible path back to balance, and thus Australian fiscal sustainability? The weaker budget
outcome this year due to the falling terms of trade and high AUD suggests some structural vulnerability in the budget. Just as the broader economy needs to adjust to a lower terms of trade and a higher AUD, so too does the Government sector. A broadening of the revenue base and/or a reprioritisation of expenditure is required. A Government announcement to deliver the required reforms during an election year would be a welcome surprise.Third, does the budget support long-term structural reform to lift productivity growth?
I disagree with the ANZ on one crucial assumption. It is this, the forecast terms of trade, which ANZ sees falling just 0.5%, Treasury currently sees -2.5%. I see more like -7-8%:
In my defense, note how bad Treasury has been at forecasting the ToT. It missed wildly in every year except 2005/6. I too see the ToT remaining at elevated levels in the long term, just not high enough to prevent a serious income recession that will hit the bottom line of the budget much harder and will threaten the AAA rating unless whoever is in power cuts hard enough for it to be pro-cyclical. In that event, of course, the economy will be hit as well, government receipts will fall and AAA rating will still be at risk.
It’s not just me forecasting this. What do you think the roaring iron ore miner equity bear market is signaling?
