Is the Government's Budget surplus just pure luck?

Wed, 09 May 2018  |  

This article first appeared on the Yahoo7 Finance website at this link: https://au.finance.yahoo.com/news/governments-budget-surplus-just-pure-luck-003443629.html 

--------------------------------------------------

Is the Government's Budget surplus just pure luck?

 The Treasurer Scott Morrison was all smiles on budget night, when he announced a budget surplus in 2019-20, a year earlier than previously forecast.

As it stands, it will be the first budget surplus since 2007-08 and if it is delivered, it will mark the start of the long process of reducing gross government debt which is still on track to hit a record high around $600 billion in 2020-21 before it starts to fall. According to the budget documents, net debt is on track to decline from next year and if all goes well in the economy, it will keep falling through to at least 2028-29.

In looking at how this about turn on the budget and government debt occurred, it is important to understand that it had nothing to the policy finesse of the government.

Indeed, the return to surplus is wholly the result of Treasury forecasting errors which as recently as December last year, were projecting a deficit of $2.6 billion for 2019-20, and that was before the extra spending and tax give-aways that Mr Morrison was also delighted to announce. Amid the thousands of pages of budget documents, there is a table in Budget Paper 1, Statement 3 which shows how the budget deficit 0f 2019-20 morphed into a surplus in five short months.

Table 5 of that Statement (if you care to dig it up) shows that for 2019-20, in the five months between the Mid Year Economic and Fiscal Outlook and the budget, the government took policy decisions that reduced revenue by $950 million and added $599 million to spending. In total, these measures actually added $1.549 billion to the deficit.

But this is where the government got lucky.

As a result of the Treasury forecasting errors and the economy overshooting expectations, tax and other revenue was revised higher, by a thumping $7.995 billion in 2019-20 which was partly offset an extra $1.517 billion of government spending. These forecasting errors deliver a combined $6.421 billion to the budget bottom line.

All of which means that even allowing for the tax cuts and extra spending, the budget deficit turned into surplus.

Talk about lucky.

But before we get too carried away, the $2.2 billion surplus in 2019-20 is a forecast that almost inevitably will be wrong. The government is hoping the economy continues to pick up momentum and the Chinese and others importers keep buying a lot of iron ore and coal from Australia and in doing so, pay a high price for it. It is also hoping that the unemployment rate tracks lower, wages growth accelerates and real GDP growth comfortably hits 3 per cent.

It is folly to quibble with the Treasury forecasts because they are, for now, a reasonable estimate of what’s ahead. In a world where forecasts are rarely met, a reasonably benign alternative scenario where the iron ore prices edges even a few dollars below the Treasury assumption, wages growth fails to accelerate and the global economy falters for any reason, the surplus will quickly revert to a deficit.

Not that there would be anything wrong with that from an economic perspective. Indeed, if the economy is weaker than forecast it would be prudent.

The problem might be political, with the government pinning its re-election strategy on tax cuts plus a return to surplus and a promise of reduction in government debt.
The next budget update is scheduled for December when the next Mid Year Economic and Fiscal Outlook will be released. But if, as appears increasingly likely, the election will be before then, Treasury and the Department of Finance are required to produce a budget update in the Pre Election Fiscal Outlook 10 days after the writs are issued for the election.

If the economy is even a touch weaker, the 2019-20 surplus will vanish which would be an interesting interjection as the election campaign hots up.

comments powered by Disqus

THE LATEST FROM THE KOUK

Don’t look now – you are almost certainly poorer than a year ago

Wed, 09 Jan 2019

This article first appeared on the Yahoo Finance web page at this link: https://au.finance.yahoo.com/news/dont-look-now-almost-certainly-poorer-year-ago-211934583.html 

------------------------------------------------------------

Don’t look now – you are almost certainly poorer than a year ago

I am sorry to kick off the new year with some gloomy news of your finances.

It is never nice to discuss how much money you have lost, but if you are a home owner in Sydney, Melbourne, Perth or Darwin and if you have a superannuation nest egg, the odds are you are less wealthy today than you were a year or two ago.

Here are some uncomfortable facts.

The Australian stock market, where the bulk of your superannuation assets are likely to be invested, has slumped 11 per cent since August, reducing the value of stocks by around $200 billion.  No doubt your superannuation has suffered part of this loss.

At the same time, home owners in Sydney, Melbourne, Perth and Darwin are seeing the value of their homes getting crunched.

Here are some examples.

Falling dollar reflects global concern all is not well in the Australian economy

Mon, 07 Jan 2019

The article first appeared on The Guardian website at this link: https://www.theguardian.com/business/2019/jan/03/falling-dollar-reflects-global-concern-all-is-not-well-in-the-australian-economy 

--------------------------------------------------------- 

Falling dollar reflects global concern all is not well in the Australian economy

The Australian dollar was hit hard overnight, Australian time, slumping below 70 US cents before a sharp and more extreme move saw it temporarily crash to a low of 67.40 US cents. It subsequently recovered marginally, but remains weak at around 69.40 US cents.

Rather than focus on the micro aspects of minute-by-minute or hour-by-hour moves in the dollar, which can be more noise than substance, the trend for the dollar over the past year has been down.

In January 2018, the Australian dollar was trading at 81.50 US cents.

There is increasing concern from global investors that all is not well with the Australian economy. Policy is in a do-nothing phase. Entrenched low wages growth is hampering growth in household spending. This is being complemented, in a negative way, by a sharp fall in wealth as house prices drop and the share market weakens, both of which will be a negative for the economy during 2019. This is because householders are simply not getting the income growth nor wealth accumulation needed to allow them to keep spending at a rate that will see the economy expand at a pace that will generate upside wage and inflation momentum. Strategies aimed at reducing debt and paring back new borrowings mean, by definition, weaker economic growth over the near term.