Budget assumptions too optimistic again

Here they are:

OK, so the external prices are pretty good. Iron ore is unchanged from $55FOB which is more like $65CFR. The events surrounding Vale make that conservative for the next year, probably about right for 2020/21 and too high the following year as China slows. Coking coal prices of $150 within one year are reasonable. Further out they are too high. Thermal is decent too if on the high side. Oil and the AUD are fair enough.

It is reasonable to expect better than forecast revenues from commodities for the coming year, roughly right for 2020/21 and a big problem thereafter, assuming there is no end of cycle event.

That’s where the good news ends. The domestic outlook is a joke. Pretty much every number is too optimistic, from growth to unemployment.

This will mean that any good news from commodity prices will very likely be offset by bad news from domestic weakness.

Westpac has done some more comprehensive numbers which are a solid base case (if also a bit optimistic for me, especially wages):

Ratings agencies see it much the same way. Moody’s:

Australia’s Commonwealth budget position has improved significantly during the past year, assisted by strong revenue growth, reflecting higher-than-expected commodity prices and strong employment growth.

At the same time, the government has provided support for the economy through its infrastructure spending, while overall spending growth has remained contained.

Looking ahead, the Budget indicates an ongoing, but modestly slower, pace of fiscal consolidation than was previously indicated at MYEFO.

On the other hand, there are risks to the fiscal outlook. The world and Chinese economies are slowing modestly, while the pace of Australia’s domestic economy will also slow this year. In this climate of slower growth, the impact of still-weak wages growth, lower housing prices and a potential easing of employment growth are key uncertainties for spending and government revenues, though personal tax cuts should help to offset these factors.

Overall,  Australia’s high levels of debt affordability and moderate debt burden will remain in line with its Aaa rated peers.


“The deficit and debt targets presented in Australia’s pre-election budget on Tuesday are broadly in line with Fitch Ratings’ expectations when we affirmed Australia’s ‘AAA’ rating with a Stable Outlook last October. The budget preserves a path for reaching an underlying cash surplus in FY20. The commitment to prudent fiscal management has been a supporting factor for Australia’s ‘AAA’ rating.”

“While Fitch Ratings sees a return to an underlying cash surplus by FY20 as achievable, we anticipate lower revenues and a narrower surplus than in the budget, based on our forecasts of slightly lower GDP growth and employment than in the budget. The difference, however, is not material to our credit outlook.”

“The proposed income tax cuts in the budget would provide some support for the economy, which has slowed since mid-2018, but make the fiscal trajectory even more sensitive to commodity prices, and outturns for GDP and wage growth. As such, the budget could be more sensitive to domestic and external risk factors.

“Federal elections are due in just over a month. Fitch Ratings believes there is a general cross-party consensus for sound fiscal management in Australia. Of course the specific policy approach could well shift after the elections.”


Global Ratings said today that its credit rating on Australia (AAA/Stable/A-1+) reflects its expectation that the general government, including state and local governments, will return to surplus by the early 2020s. When we revised our rating outlook in September 2018 based on a return to fiscal surplus, there was significant market uncertainty around Australia’s political and future fiscal position. The federal budget released today supports our view that the government is on track to return to surplus. The central government will achieve stronger fiscal outcomes than we anticipated in the near term because of robust commodity prices and terms of trade. This has helped to deliver higher revenue growth. At the same time, better labor market conditions have lowered expenditure outflows compared with previous budgets. These stronger outcomes have helped to fund new policy announcements in today’s budget.

In short, once commodity prices diminish, which is foreseeable in the next term of government, there will be chaos again for external revenues with no domestic offset resulting in a round of pro-cyclical austerity.

A problem for another day. Or, more to the point, another government.


  1. Tassie TomMEMBER

    3.25% increase to Wage Price Index in 2021-22? LOL LOL LOL

    Are all Commonwealth employees going to be offered pay rises equal to the Wage Price Index assumptions? LOL LOL LOL

  2. Their wage assumptions are a joke (as is Westpac). As the labour market weakens, and inflation expectations subside, wage growth is going to FALL.

  3. GunnamattaMEMBER

    The only chart we really need to look at

    But Peter Martin nicely nails the basic perception reality balance over at the conversation

    When, for whatever reason, the higher iron ore prices recede (and that’s what the Treasury says it is expecting), the budget will look much worse. Unless consumer spending and wages pick up, which is also what the Treasury says it is expecting, in the face of evidence to the contrary.

    It’s the budget cash splash that reaches back in time – The Conversation, Martin

    • It is worth remembering that the band kept playing as RMS Titanic sank to the bottom of the Atlantic Ocean.

      Heroic professionalism.

    • haroldusMEMBER

      My favourite failed prediction is Budget 2011-12.

      Imagine how much I would be earning now if that fantasy were true!

      • That graph shows executive remuneration growth estimates and it has been, if anything, pessimistic. Had

  4. reusachtigeMEMBER

    Yeah nah. This budget is an election winner. Well done. Too bad loser Shorten, too bad. Bloke has no hope of winning.

    • I don’t know about that, but they are certainly following the Neville Wran formula of giving the punters a reason to vote for them. But I think people made their minds up a while ago. Shorten has to start this campaign as red hot favourite despite their policies.

      • reusachtigeMEMBER

        Everyone I know hates that loser Shorten and I know the right sort of people!

    • Actually the only thing that might save this govt is self interest. Which this budget appeals to. Shorten appears to be on a higher taxing path. But we wont really know how much this matters until people start tuning in to this instead of MAFS, so the last week of the campaign.

      • reusachtigeMEMBER

        Self interest is the only interest, oh, other than Lower teh interest rates, that will fix thing.

      • Well, numerous past surveys show that voters are MORE interested in health / education etc, than tax cuts.

    • Reusa,
      “Everyone I know hates that loser Shorten”
      – in a two horse raise it doesn’t matter if more people hates SloMo more.
      You need to broaden your relationship pool.

  5. “The domestic outlook is a joke. Pretty much every number is too optimistic, from growth to unemployment.”

    I sense desperation.

  6. TheRedEconomistMEMBER

    Who was the back bencher in the yellow dress behind FriedBurger?

    The Liberal looking at the School Yard adage that if you are going to look at School Captain all the time… vote the attractive one.

    Sco Mo continued Smirk is a liability. Dead set shonkster!!

    • I’m going to vote for Dr Murray. But second preference is up for grabs.

      Do the Labs have any lookers?

      • reusachtigeMEMBER

        Being good looking is the most important thing in life as it increases your natural relations potential. Sadly only some politicians have got that message, those with multiple investment properties – the most effective way to bypass natural selection.

    • GunnamattaMEMBER

      Sco Mo continued Smirk is a liability. Dead set shonkster!!

      I dont trust the ALP as far as i could kick them.

      But every time i see that ScoMo smirk i think i have to vote ALP. ScoMo may well be Big Australia Bill’s biggest weapon. Which seeing as ScoMo thinks Big Australia Bill is the Torynuffs biggest weapon tells us everything we really need to know about where Australian politics is right now.

      • proofreadersMEMBER

        +1 It goes with the territory of a happy-clappy. And just to think we probably doubted that there would be anybody to match Costello in the smirk dept – ScoMo puts Pete to shame.

    • A chain smirker. What is it with these blokes? Costello had this affliction too.

      • C’mon, when you are born to rule, you are not obliged to hide your contempt for the other side. Simples.

    • proofreadersMEMBER

      The nice yellow dress was being worn by Nicolle Flint, a South Aust MP. And it provided an interesting counterpoint to the droning Josh FrydenShameless.

  7. SamscoutMEMBER

    The Coalition have always outperformed their budget forecasts – the original deficit was supposed to be $18 billion and it came in at $4 billion. The left wing economists always say the coalition are too optimistic and yet they always outperform. Compare to this to Swan who always blew out the forecasts. Worth noting company tax receipts are $95 billion up from $67 billion two years ago – just goes to show yet again how the media and Labor are wrong yet again – the coalition has cracked down on multinational tax avoidance picking up another circa $12 billion or so. Under Labor company tax went nowhere despite coal and iron ore reaching US300 and US150 a tonne respectively. Labor certainly squandered the mining boom.

    Despite all their internal infighting the coalition has stopped the boats and return the budget to surplus. Having said that I wish they’d stop giving out one off rebates and just lower the income tax rate instead.

    • So, as you state, your judgement is entirely based on two performance measures – stopping boats and budget surplus?

      • reusachtigeMEMBER

        Yeah so what? SO bloke having an opinion that these are important don’t wash well with youse commies huh?

    • reusachtigeMEMBER

      Hey bloke, that sort of opinion is not welcome here. Only commie comments in favour of loser Shorten are allowed.

  8. proofreadersMEMBER

    The Pascometer is flashing raging red in The New Daily today, putting the boot in to Fraudenberg’s budget.

  9. ChristopherJMEMBER

    Good summary, H&H. Re forecasts, a personal story.
    I was working for one of the State Treasuries at turn of century and was asked to do an analysis and report for the Premier of Treasury’s published (budget) revenue forecasts.

    Of course, they were all under estimates, at least they had been in the past. I observed this and my report suggested how such a bias may have occurred, and why it was likely to keep happening in the future.

    I then did a full stat analysis and went out to determine the most probable outcome for each revenue item in the budget, based on observable errors in past forecasts. Gave them point forecasts, confidence intervals and so on.
    Report never got out of the CEO’s office.
    My forecasts were almost spot on a year later.
    Much too smart for my own good as a younger man….

  10. there is no need to wait for commodity prices, they are almost irrelevant compared to the size and importance of residential construction industry
    there is nothing that can fill the crater left after construction implosion