Budget to return to surplus amid economic growth
Josh Frydenberg’s headline-grabbing claim that the budget will return to surplus in the current financial year and deliver successive surpluses in the next four years is based on a rosy outlook for the economy. Growth is expected to be 2.75% in 2019‑20 and 2020‑21, before rising to 3% in the following two years.
These forecasts make a number of significant assumptions about where the growth will come from, with the budget papers saying that household consumption, business investment, public final demand and exports will all contribute to growth. Unemployment is expected to flatline at 5% until as far out as 2023.
This despite mainstream economists downgrading their outlook for the Australian economy in the teeth of falling house prices in the two biggest cities of more than 10%, declining wages and uncertainty around the global economy. Economists at UBS have forecast the economy is so weak that the Reserve Bank will have to cut interest rates twice by the end of the year, possibly starting as soon as July.
Net national debt will hit 0% by 2029-30
This ambitious target would put Australia in a very exclusive club among the world’s developed economies. US national debt is trillions of dollars and amounts to more than 100% of GDP. Most nations owe many billions.
But Frydenberg has promised that as the economy moves into surplus in the next four years, national net debt will begin to be paid down. To achieve this, he assumes economic growth will not dip below 2.75%. These predictions place Australia well ahead of other developed economies and would represent a near miraculous 38 years of continuous growth.
The budget documents also highlight that the government does not expect to have to introduce any fiscal stimulus or change any “current policy settings” to hit the debt target. Prudent financial management is instead earmarked to do the hard work.
The budget papers say: “The medium-term projections reflect the assumption that current policy settings do not change over the medium term.”
House prices may fall but household spending should fill the gap
The budget papers sound a note of caution over house prices, which Treasury says pose a downside risk to the economic forecasts. It says the impact is “difficult to estimate” because the housing downturn is unusual in that it has accompanied low unemployment, rising incomes and low interest rates. In a nod to mounting alarm about the possible negative wealth impact of declining property values and the consequent debt overhang in many leveraged households, the budget says house prices “could constrain household spending amid high levels of household debt”.
Despite the potentially negative impact of a 10% fall in house prices – which Treasury concedes will knock 0.5% off GDP after two years – the budget says that faster-than-expected wage or employment growth could lead to household consumption growth being stronger than forecast. This is partly due to planned infrastructure spending of $100bn to pump-prime the economy, the budget says, and tax cuts worth billions over the forecast period. This assumed pickup in wage growth (see below) would reverse a long period of stagnation and also assumes a counter-intuitive increase in household spending amid a struggling housing market.
More jobs and higher wages
The positive outlook for the domestic economy will result in what the budget calls “solid employment growth” as part of its prediction that the jobless rate will remain at 5% for the foreseeable future. Wage growth is also expected to pick up as growth in the economy strengthens and spare capacity in the labour market continues to be reduced.
This assumes that the Reserve Bank’s longstanding prediction of a tightening labour market – that is, more bargaining power for workers as vacancies outstrip the number of people looking – will come true. But the long-term changes in the labour market, such as a big decline in well-paid, full-time positions and a big increase in less secure, part-time work, have consistently worked against this. So despite falling unemployment, the traditional accompanying rise in wages might never materialise.
Major trading partners continue to support growth
Australia’s major trade partners in Asia will continue to see strong growth, the report says, and help to maintain domestic growth. There is “a high degree of uncertainty around the global growth outlook” but easing tensions over trade issues between the US and China have helped to improve the outlook, while indications from the US Federal Reserve that it will not raise rates this year have reduced the risk of an emerging markets debt crisis. Concerns about Brexit have become more pronounced, it says, before noting that Australia is more oriented to Asia than Europe.
However, the assumption of continued growth in the major trading partners is combined with notably pessimistic forecasts for growth in the US and China. It says the US economy will grow by only 1.75% by 2021, compared with 3% in 2018. Chinese growth will slip from 6.6% last year to 5.75% by 2021, crimped by “longer-term structural adjustments” such as a declining working-age population.
Billions saved in tax crackdown on multinationals
The government is planning to give the tax office $1bn over four years to help it crack down on multinational tax avoidance, which it estimates will raise $3.6bn over four years in net terms.
Just $2bn of that will show up on the budget in underlying cash balance terms because of the “delay between revenue liabilities raised as a result of the compliance activity and the subsequent cash collections”, according to budget papers. Whether it’s delayed or not is one thing, but they’d better hope it shows up because it’s a fair chunk out of project surpluses if not.
