Here's what we could expect for the 2018 Federal Budget

Tue, 27 Feb 2018  |  

This article first appeared on the Yahoo 7 Finance website at this link https://au.finance.yahoo.com/news/heres-expect-2018-federal-budget-004452841.html 

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Here's what we could expect for the 2018 Federal Budget

Treasurer Scott Morrison is about to do cartwheels down the corridors of Parliament House, such is the unexpected improvement in the budget position over the past year.

A surprise surge in company tax collections, a lift in goods and services tax receipts and an undershoot in planned government spending has seen the forecast for the budget deficit for the first seven months of 2017-18 come in more than $6 billion lower than was assumed when the Mid-Year Economic and Fiscal Outlook was released in December. If this trend continues through to the end of the financial year, the budget deficit could fall to around $15 billion which would be the smallest deficit in the current cycle, that is, since the last budget surplus was recorded in 2007-08 and all of the improvement will have been driven by a surge in tax receipts.

More importantly, the improved budget momentum will almost certainly parlay through to the so-called out-years of the budget which will leave to smaller deficits and larger surpluses.

While there is always plenty of debate about the economic parameters underpinning the budget forecasts over the 3 or 4 years of the forward estimates, when Morrison hands down the budget on 8 May, he is likely to announce that budget position over the four years has markedly improved.

Included in the budget will be news that the 2018-19 deficit will be revised down from $20 billion to under $10 billion and in 2019-20, a surplus will be forecast. Importantly, the 2020-21 surplus, currently estimated to be around $10 billion, could be revised as high as $15 billion or even more on the basis of no policy change as the company tax and other revenue floods in.

It is at this point where politics will likely trump economics.

After more than a decade of continuous budget deficits, which will have totalled close to $400 billion, economic policy conservatism would argue for the government to lock in decent sized surpluses for at least to few years before offering to blow the windfall gain. Surpluses, albeit only moderate ones, would allow the level of debt to be trimmed and with that, government debt interest payments could be reduced in what looks like an environment of rising global interest rates.

With the government trailing badly in the polls and the Federal election scheduled for the next year or so, there seems little chance this conservatism being followed. It is more likely that on budget night, Mr Morrison will hand down a budget that will be designed to win votes with the proverbial offering of a fist full of dollars. Get set for a budget night which includes announcements of income tax cuts and spending targeted to a range of marginal seats.

The message will be “we are delivering a budget surplus and giving tax cuts”.

For some, it will no doubt sound impressive.

It is likely to see the government claw back some electoral support, at least in the short term. It will be interesting to see whether the policy ‘sugar hit’ will works on enough members of the electorate who have heard it all before.

Or whether, even they do actually want to see larges surpluses and cuts to government debt, rather than what will be just a few dollars more in their pay packets.

 

 

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Don’t fall for the spin - Scott Morrison’s budget surplus is no certainty

Thu, 06 Dec 2018

This article first appeared on the Yahoo Finance web site at this link: https://au.finance.yahoo.com/news/dont-fall-spin-scott-morrisons-budget-surplus-no-certainty-224422761.html 

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Don’t fall for the spin - Scott Morrison’s budget surplus is no certainty

Prime Minister Scott Morrison could yet be guilty of prematurely declaring that his government will deliver a budget surplus in 2018-19.

Sure, tax revenue is growing at a rapid pace and the government is underspending on a range of government services, but there are still seven long months to go between now and the end of the financial year that might yet blow up the surplus commitment.

PM Morrison’s ‘return to surplus’ boast is based, it appears, on hard data for the first four months of the 2018-19 financial year on revenue and spending information from the Department of Finance. These numbers do look strong, at least in terms of the budget numbers and if the trends on revenue and spending continue, the budget will probably be in surplus. Treasury will be factoring in ongoing economic growth, no increase in the unemployment rate and buoyant iron ore and coal prices over the remainder of the financial year. These forecasts and hence the budget bottom line are subject to a good deal of uncertainty, as they are every year.

If, as is distinctly possible, the economy stalls in the March and June quarters 2019, commodity prices continue to weaken and if there are some unexpected increases in government spending, the current erroneous forecasts for revenue and spending could leave the budget in deficit.

Change of view on monetary policy

Wed, 05 Dec 2018

In the wake of the September quarter national accounts, and with accumulating information on house prices, dwelling investment, the global economy and spare capacity in the labour market, I have revised my outlook for official interest rates.

For some time, I have been expecting the RBA to cut the official cash rate to 1.0 per cent, a forecast that has been wrong (clearly) given its decision to leave rates steady right through 2018.

That said, it has been a highly profitable call with the market pricing interest rate hikes when the call was made which has yielded a decent return as time has passed.

My updated profile for RBA rates is:

May 2019 – 25bp cut to 1.25%
August 2019 – 25bp cut to 1.00%
November 2019 – 25bp cut to 0.75%

The risk is for rates to 0.5% in very late 2019 or in 2020

It will be driven by:

  • Underlying inflation remaining below 2%
  • GDP growth around 0.25 to 0.5% per quarter in 2019
  • Annual wages growth stuck at 2.5% or less
  • Global growth slowing towards 3%
  • Labour market under-utilisation around 13 to 13.5%

There are likely to be other influences, but these are the main ones.

AUD, as a result, looks set to drop to 0.6000 – 0.6500 range.