This article first appeared on The Guardian website at this link: https://www.theguardian.com/business/2015/nov/27/budget-deficit-narrowing-is-manna-from-heaven-for-scott-morrison
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Budget deficit narrowing is manna from heaven for Scott Morrison
Better than expected jobs growth, low inflation and an RBA dividend windfall point to a near-term surplus –
The treasurer, Scott Morrison, must be feeling pleased with the recent news on the budget.
None is of his own making, but the budget data for the first four months of 2015-16 has the underlying cash deficit running at $1.6bn below the estimate made in the budget back in May. If this sort of narrowing of the deficit continues over the remainder of the year, the final budget outcome for 2015-16 could be as low as $30bn, a good deal below the $35.1bn deficit estimate of his predecessor, Joe Hockey.
Especially good for Morrison is that the narrowing in the deficit has been evident for four months and is not, it appears, a one-off blip. That means the path to a narrower deficit is likely to continue. The rate of jobs growth is far exceeding budget-time estimates, which by itself should underpin the income tax paid by those extra workers. Wages growth, the other element of income tax payments, is low but is no weaker than the budget time estimates, so there are no concerns over income tax collections.
The stronger employment levels in the first third of 2015-16 have the unemployment rate tracking well below the budget-time forecast. This lower than forecast unemployment rate is a key factor holding back growth in some big-ticket items of government spending.
The improved budget bottom line has occurred with both revenue and spending tracking a little below budget forecasts. The very low inflation rate may account for this uniform step-down in both sides of the budget ledger.
Going forward, there is enough in the more recent run of economic news to expect that the budget deficit will not only come in lower for the current financial year, but that the good news will extend into the budget forward estimates. If the economy can register the pick-up in economic growth over the next few years broadly as was forecast in the budget, lower deficits and a possible earlier return to surplus could well be in the offing.
There is some risk that the recent business investment outlook data will crimp some growth in the next year. Luckily, the economic strength outside business investment appears solid enough to lead to decent economic outcomes, at least in the near term.
The government and its budget are also certain to benefit from solid dividends to be paid by the Reserve Bank. One of Hockey’s early policy tricks was to give the RBA $8.8bn it did not need or request, but he did so to make the budget deficit in 2013-14 look bad, and blame Labor for it. It was obvious to all, and especially Hockey, that the RBA would pay back this dividend over time, which is what will happen.
The fact that the Australian dollar is tracking in the low US70c range has meant a massive windfall to the RBA, meaning that the annual dividends to the government are likely to be $2bn or more in each of the next few years.
So where does this all leave the budget?
The short answer is a near-term surplus, barring some hare-brained spending or tax cuts from Malcolm Turnbull. The May budget estimates were projecting a budget deficit of only $6.9bn in 2018-19. Based on recent data, the better than forecast state of the labour market and likely chunky dividend payments from the RBA, next month’s mid-year economic and fiscal outlook (Myefo) could well show 2018-19 being in surplus.
