From Adam Boynton at Deutsche:
MYEFO likely to present a worse fiscal outlook than the May budget Publishing a budget or MYEFO (Mid-Year Economic and Fiscal Outlook) preview comes with an interesting question. Namely, should our preview attempt to forecast the numbers we think the Treasury will publish in the document, or the numbers we think will ultimately be seen a few years down the track (or, in other words, the numbers we would publish)? In this preview we do both, first up looking at what we think the MYEFO will contain, before then turning to our own estimates of the Federal fiscal position.
On account of higher commodity prices Treasury’s nominal GDP growth forecast for 2016-17 is likely to be revised higher. Indeed we expect Treasury to forecast growth of 4¾% for this year, up from 4¼% expected at the time of the May budget. The problem for the Budget isn’t 2016-17 though. Even a mild pull-back in commodity prices (which we would expect the Treasury to forecast) combined with weakness in wages growth means that the nominal growth forecast for 2017-18 is likely to be well below the May budget forecast of 5%. While our forecast for nominal growth in that year is 3¼%, we suspect the Treasury will settle around 3¾%. (We should note that getting anything above 4% nominal growth in 2017-18 would take some quite optimistic assumptions in our view.) With slower nominal growth over 2016-17 and 2017-18 in aggregate (and some obstruction in the Senate), the MYEFO should therefore show a weaker fiscal position than the May budget. Specifically we expect the Treasury to forecast a budget deficit of $36.0bn in 2016-17 (2.1% of GDP), $26.3bn in 2017-18, $19.6bn in 2018-19 and $10.3bn in 2019-20 (0.5% of GDP). The equivalent forecasts from the May budget were: $37.1bn (2.2% of GDP) in 2016-17, $26.1bn in 2017-18, $15.4bn in 2018-19 and $6.0bn (0.3% of GDP) in 2019-20. We think Treasury may (just) manage to estimate the budget in balance in 2020-21. Further out getting beyond balance into even a very modest surplus is likely to be difficult (unless the forecasts step away from the 23.9% of GDP tax cap or the Government proposes further saving measures).
