2019-20 budget will be 'problematic': here's why

Wed, 20 Feb 2019  |  

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/2019-20-budget-will-problematic-heres-194957605.html 

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2019-20 budget will be 'problematic': here's why

Word has it that the framing of the budget, due to be handed down by Treasurer Josh Frydenberg the day after April fools day (and around 6 weeks before the election), is more problematic than usual.

Problematic because there is some mixed news on the economy that will threaten the current forecast of a return to budget surplus in 2019-20.

Housing has gone into near free-fall, both in terms of prices and new dwelling approvals. This is bad news for GDP growth.  The unexpected severity of the housing slump is the key point that will see Treasury revise its forecasts for GDP growth, inflation and wages lower when the budget is handed down.

It will be impossible for Treasury to ignore the recent run of hard data, including the weakness in consumer spending and a generally downbeat tone in the recent economic news when it sets the economic parameters that will underpin its estimates of tax revenue and government spending and therefore whether the budget is in surplus or deficit.

By themselves, these changes are enough for an independently compiled set of forecasts for 2018-19 and 2019-20 to see the budget remain in deficit.

The Reserve Bank of Australia released a comprehensive set of up-to-date forecasts two weeks ago, in the quarterly Statement on Monetary Policy. These forecasts were surprisingly upbeat and optimistic compared with the recent run of news, but they were materially weaker than the latest Treasury forecasts from December 2018 which underpinned its estimate of a return budget surplus in 2019-20. The latest RBA forecasts for GDP growth are 0.25 per cent lower than those of Treasury in both 2018-19 and 2019-20. This does not sound like a big difference, but 0.25 per cent of GDP is around $5 billion a year, in current price terms. The weaker growth rate will undermine estimates of tax revenue if Treasury uses similar forecasts to the RBA’s.

Importantly, the RBA forecasts for inflation are a huge 0.75 per cent and 0.25 per cent lower, respectively, than the Treasury forecasts. Lower inflation means lower GST revenue, although there is a slight offset with lower indexation of some government payments. The RBA forecasts for wages growth in 2019-20 is 0.5 per cent lower than Treasury’s forecasts. This will mean lower income tax payments, slower spending growth and softness in other revenue for the government.

The only areas which may provide something of an offset to the generally weaker economic climate is a slightly stronger growth rate in employment as outlined by the RBA and unexpected increases in some commodity prices.

Deficit forecast likely for 2019-20

These events are helpful to estimates of revenue but are unlikely to be enough to stop Treasury from forecasting a deficit in 2019-20. There is simply too much bad news.  The rule-off date for the budget numbers will be around 26 March, a few days before the budget documents go to the printer.

Between now and then, there will be a flurry and new information on the economy which will impact the final Treasury budget forecasts. Data on wages, GDP, employment, retail spending, house prices, dwelling construction, business investment and news from the global economy could yet turn out to be positive, but more likely, the run of disappointing news will continue.

The government will be hoping that the run of data at least consolidates and doesn’t get any weaker.

If there is in fact a run of weak numbers, even the RBA forecasts will need to be revised lower and with that, will go hopes of a return to budget surplus in 2019-20.

This would be a huge blow to the government, already miles behind Labor in the opinion polls, especially as it is hoping to campaign on economic management as the election draws near.

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