Inside MYEFO

Via Westpac:

• The Treasurer will release the Federal Government’s MidYear Economic & Fiscal Outlook (MYEFO) on Monday of next week, December 17.

• The update will reveal an improved budget position – largely higher tax revenue – on stronger national income growth, a robust labour market and, to date, an undershoot on expenditures. • In the May 2018 Budget, the underlying cash budget position was forecast to improve progressively, swinging from deficit to surplus. The profile from 2018/19 to 2021/22 was: -$14.5bn; +$2.2bn; +$11bn and +$16.6bn.

• The MYEFO budget profile may be in the order of: -$4.5bn; +$7.2bn; +$16bn; and +$21.6bn. The upgrade in the initial year is $10bn, with an upgrade of $5bn from 2019/20.

• This view factors in modest new spending, of $1bn in 2018/19 and then $2bn a year from next year. Revenue is upgraded by $9bn in year one and $5bn thereafter, while expenditure on existing programs undershoots by $2bn each year.

• As to risks around the MYEFO budget profile, these are in both directions. Potentially the revenue upgrade may be larger than we have allowed for, while new spending measures may be more extensive than we anticipate.

• In the May Budget, the nominal economic growth profile across the four years was: 3.75%; 4.75%; 4.50%; and 4.50%.

• We expect a revised nominal GDP growth profile of: 5.0% (upgraded by 1.25%); 4.25% (downgraded by 0.5%); 4.5% and 4.5%.

• Importantly, key commodity prices – including coal and iron ore – surprised to the high side over recent months, boosting national income. This will see the terms of trade rise in 2018/19, +1%, not fall as expected, a forecast -5.25%. More recently, commodity prices have pulled-back somewhat, pointing to a terms of trade decline in 2019/20 larger than previously anticipated.

• As to risks, uncertainty around the economic and fiscal outlook is ever present.

• On the economic front, key downside risks are the unfolding domestic housing downturn (with potential negative spill-over effects) and global trade tensions.

• The upcoming Federal election, due by 18 May 2019, is a key event risk. It remains to be seen how generous spending and tax promises will be ahead of polling day. Of significance is the impact of measures on the budget position over the medium-term, as well as any immediate costs.