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Ignore the spin, government debt is going up and up

Wed, 20 Dec 2017  |  

This article first appeared on the Yahoo 7 website at this link: https://au.finance.yahoo.com/news/2195187-050039322.html?soc_src=social-sh&soc_trk=tw 

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Ignore the spin, government debt is going up and up

Despite all the spin and torture of the data, government debt is still rising, the return to budget surplus is based on fickle economic forecasts and the Turnbull government is on track to be one of the top 10 taxing governments in Australia’s history.

Gross government debt is already at a record at $520 billion and it will keep rising through till at least 2027-28 when it will reach a new record high just under $700 billion. Net government debt (which allows for some of the assets the government owns to offset gross debt), will reach a peace-time record in 2018-19 when it hits 19.2 per cent of GDP, having roughly doubled from the time of the 2013 election.

This is a long way from promises of the Liberal Party prior to it taking office to run budget surpluses and pay off debt.

With Treasurer Scott Morrison delivering the Mid Year Economic and Fiscal Outlook, the new record levels for government debt were confirmed, notwithstanding a small narrowing in the budget deficit which was driven by an unexpected rise in the iron ore price which fed into company profits and taxes paid to the government, as well as higher superannuation taxes based on the solid performance of the stock market last year.

The budget is forecast to return to surplus in 2020-21, but this will require everything to ‘go right’ with the economy between now and then. GDP growth is forecast to pick up to 3 per cent in 2018-19 which, according to Treasury, will underpin a solid rise in employment and a further acceleration in wages. A stronger economy will deliver higher taxes which is the driver of the return to surplus, so the theory goes.

As has been evident in recent times, wages growth is weak, struggling to break above 2 per cent in annual terms and it is being held back by an underutilised workforce, technological change and globalisation.

The forecasts for a pick up in tax revenue need not only employment growth to drive PAYG tax receipts for the government, but wages growth to exceed 3 per cent for several years. This may occur and the government is banking on it, but at the moment the risks appear to the downside. Even a relatively small undershoot in wages growth costs the budget many billions of dollars which can quickly erode the surplus currently penciled in for 2020-21.

On the upside, Treasury has taken a cautious approach to forecasting the ever-volatile iron ore price. It is assuming the iron ore trades at US$55 a tonne, which is around $US10 a tonne below the current market price. This is an important driver for the budget bottom line. In the budget in May, Treasury estimated that for each US$1 a tonne change in the iron ore price, the budget bottom line is impacted by $430 million in each year. This means that a US$10 upside surprise in the iron ore price would add around $4.3 billion to government revenue in a single year and lock in larger surplus in 2020-21.

If the iron ore price remains firm, at around current levels, a large upgrade to the return to surplus may occur when the annual budget is handed down in May 2018. It would be the sort of news that would see the government move to reduce income taxes as the election draws near.

As is clear, the factors that influence the budget bottom line are many and they are usually unrelated. The key issues for the budget into 2018 will be wages, employment, iron ore and company profits. The government is banking on these being strong so that it can collect the tax revenue it needs to hand back in the form of pre-election tax cuts.

More in this category: « illion: Business forecasts bumper profits in 2018 2017 - 'Twas a very good year »
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