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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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 

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

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.