Treasurer Joe Hockey has today hosed-down suggestions that today’s stronger than expected GDP result will provide a material lift to the Budget, whilst reiterating his intentions to make expenditure cuts and place the Budget on the path to surplus. From The AFR:
“Even though companies may be more profitable, it might not necessarily be reflected in the tax they pay because of previous losses,” he told reporters after the GDP release.
The Treasurer also dismissed suggestions the improvement would increase his scope to accelerate budget cuts.
“We’re not going to undermine improving economic growth in the budget, we’re not going to do that…
“You need trend growth or better of 3 to 3.25 per cent to start to get unemployment down,” Mr Hockey said. “That is a core focus of what we’re trying to achieve”…
“We want the economy to grow faster to give people more jobs. But we are of course going to do everything we can to have a credible path back to surplus.”
Nominal GDP is the dollar value of what’s produced and earned. It’s also the measure that drives taxation revenue. While nominal GDP growth rebounded to 4.8% in the year to December, it is still well below the 20-year average growth rate of 6.4%, suggesting minimal revenue upside (see next chart).
Moreover, with the sharp decline in commodity prices since the beginning of the year (driven by falling iron ore prices), and the prospect that commodity prices and the terms-of-trade will continue to retrace back towards their longer-run average, nominal GDP and tax receipts will likely remain soft.
To add insult to injury, the Budget is also facing rising outlays from welfare payments to the unemployed, combined with growing health and aged-care related payments as the population ages.
Put simply, the Federal Budget will remain under pressure well into the future, which will require both cuts to expenditure and rising taxes in order to return it to surplus.
