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.

It is a dangerous game. Politically at least.

Economies and budgets can alter very quickly as a run of uncertain news and events impact on consumers and the business sector. Global shocks come jump out to derail even the best forecasts. Clearly, a lot can change for the budget between now and the Treasurer handing down of the budget on 2 April 2019 Budget.

Even more can change between when the budget is handed down and when the financial year comes to an end on 30 June 2019. This gap alone is a further three months of news that can have a material and unexpected impact on the budget bottom line.

Government spending in 2017-18 will be around $475 billion, a similar number to total revenue. A 1 per cent forecasting error on either revenue or spending could cost the budget close to $5 billion. And 1 per cent forecasting errors have occurred in the past. Mr Morrison’s proud announcement of a surplus seems risky, but it may be a political plus for the beleaguered government. Part of the electorate thinks that the budget balance is a measure of economic management competence and a surplus will be seen, by them, as good news.

But there is a twist.

The final budget outcome for 2018-19 – whether it is in surplus or deficit – will not be known until September 2019, some four months after the voters have made their decision. This means that in the event of a shock Coalition win at the election, the budget could ‘surprisingly’ drop back into deficit but, perhaps ironically, Mr Morrison will still be Prime Minister despite the failure to deliver on his promise.

At the macroeconomic level, there is very little difference between a budget deficit of a billion dollars or two and a surplus of a billion dollars or two. Recall annual GDP in Australia is close to $2 trillion.

But politically, the surplus / deficit issue can be important particularly when the surplus the government says it is delivering cannot be checked until after the election, even though it may sway a few voters to give their vote to the Coalition.

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THE LATEST FROM THE KOUK

The RBA has the tools to fix the economy, but is reluctant to use them

Thu, 05 Dec 2019

This article first appeared on the Yahoo Finance web site at this link: https://au.finance.yahoo.com/news/rba-tools-reluctant-042742904.html

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The RBA has the tools to fix the economy, but is reluctant to use them

The Reserve Bank of Australia has made a range of serious policy errors over the past few years, and the Australian economy is weaker because of those mistakes and misjudgments.

Not only is the RBA on track to miss its inflation target for six years, and perhaps longer, the persistently high unemployment rate in concert with record low wages growth is the result of the RBA’s tardiness in cutting interest rates because of its textbook obsession with house prices and household debt.

It is a mistake that has cost the economy tens of billions of dollars in lost output; employment is many thousands of people below what could have been achieved; and all the while wages growth hovers near record lows undermining the wellbeing of the workforce. What’s worse, the RBA seems to have thrown in the towel on trying to meet its inflation target, even though that target was confirmed a month ago in the recent update of the Conduct of Monetary Policy between the RBA and Treasurer.

In this context, Deputy Governor of the RBA, Guy Debelle, gave a fascinating speech earlier this week on the topic of employment and wages.

Household wealth is booming: What this means

Mon, 25 Nov 2019

This article first appeared on the Yahoo website at this link: https://au.finance.yahoo.com/news/household-wealth-booming-200022930.html 

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Household wealth is booming: What this means

$500,000,000,000.

In other words, half a trillion dollars.

That is approximately the amount Australian household wealth has increased since the start of July 2019, with house prices surging, the Australian stock market moving higher, and savings increasing.

The bulk of the gains have occurred via rising house prices, which according to CoreLogic, are up over 5 per cent in less than five months. This move in house prices has added around $360 billion to the value of housing and is driving the rebound in wealth. At the same time, the level of the ASX has risen by around 2 per cent with a further $40 billion being paid out in dividends. This allows for the recent pull back on prices as new banking scandals are exposed.

In these conditions of rising wealth, the household sector is getting a serious financial reprieve, despite the ongoing weakness in wages and the still very high level of unemployment and underemployment which afflicts almost 14 per cent of the workforce.

The good news is that this wealth creation is likely to spark a rise in household spending growth once the gains are widely acknowledged in the community and then feed into consumer sentiment. This is most likely to show up in the first half of 2020, after the usual lags work their way through the economy. History shows that when we consumers experience growth in our wealth, we are more inclined to lift our spending.

Earlier this year, RBA researchers Diego May, Gabriela Nodari and Daniel Rees found that:

“When wealth increases, Australian households consume more. Spending on durable goods, like motor vehicles, and discretionary goods, such as recreation, appears to be most responsive to changes in household wealth”.

We saw this, in the reverse, in the period from the middle of 2017 to the middle of 2019 when Australia-wide house prices fell by 10 per cent, crunching wealth levels. It was no surprise that during this period, household spending growth slumped. The retail sales component fell to its weakest since the early 1990s recession. Consumer spending and confidence was not helped by the coincident weakness in wages growth and the policy mistake of the RBA which refused to cut official interest rates, even though the economy was mired in a low inflation, low growth and falling wealth climate.

Thankfully, common sense has since prevailed at the RBA and it has cut interest rates three times since June.

Demand for housing has also lifted with shrewd first home buyers taking advantage of favourable affordability and investors also stepping back in after the May election saw the return of the Coalition government and the demise of Labor’s proposal to reform negative gearing tax laws. The current wealth surge unfolding now is occurring at a time when there is also a sharp decline in the debt-servicing burden as interest rates fall. This has the dual effect of freeing up cash flows for some consumers and allows other to accelerate their debt repayment.

For the moment, the labour market remains weak and wages are still stuck in the mud. These will constrain any near term lift in household spending, but the wealth lift will be vital for sparking a pick-up in consumption, probably in the new year when the effect is more widely observed and entrenched.

It adds to the scenario where 2020 is looking like a better year for the economy with bottom line GDP growth set to hit 3 per cent in the second half of the year.  If the wealth effects build further over that time and business investment and infrastructure spending continues to lift, the economy in 2020 just might register its strongest growth rate in a decade.