Federal budget
- The underlying budget deficit continued its modest improvement, easing from $59.3 billion in the twelve months to November 2010 to $58.5 billion in the 2010 calendar year. CommSec estimates that the budget deficit equates to 4.5 per cent of GDP.
- Each monthly budget deficit over the next six months needs to improve by almost $3 billion compared with the same months of 2010 ($17 billion in total) for the Government to meet its full year budget deficit target of $41.5 billion.
- The best improvement in the budget position over a six-month period in the past has been just $8.7 billion. Still, the biggest deterioration has been $37 billion. The target is not impossible, but still difficult given the slowdown of the economy and recent floods.
- Annual revenues stand at seven-month highs while annual expenses lifted to record highs in calendar 2010.
What do the figures show and what does it mean?
- The Government has plenty of grounds to be worried about missing its deficit target for this year. The annual budget deficit stood at $58.5 billion in December, down only slightly on the $59.3 billion shortfall in the year to November. The Government is aiming for a budget deficit of $41.5 billion in the 2010/11 year, but that does look like a big ask given the recent slowdown by the economy and complication of the floods.
- Basically for the next six months each monthly budget result needs to improve by $3 billion compared with a year ago. The annual budget deficit needs to improve by $17 billion over the next six months to hit the Government target.
- The good news is that budget revenue in December was higher than a year ago. And rolling annual budget revenues hit a seven-month high in December at $295.3 billion. The problem is that expenses are still growing. In December alone expenses were $4.7 billion higher than a year ago. Annual budget expenses hit a record high of $353.4 billion in calendar 2010.
- Annual budget revenues are certainly growing again, but are up just 0.3 per cent on a year ago. By comparison annual expenses are 4.9 per cent higher than a year ago.
- GST revenues totalled $47.6 billion over calendar 2010, just short of the record high of $47.9 billion in the year to October 2010. Annual GST revenues are a healthy 9.6 per cent higher than a year ago, no doubt a pleasing result for state and territory governments across the nation.
- So what does it all mean? The Government will have to continue to look for savings and will have to hope that the Reserve Bank does stay on the interest rate sidelines so that the economy can motor out of the current soft patch. And consumers and businesses may need to brace for either budget spending cutbacks or higher taxes.
- The Government may argue that the budget deficit of $36.7 billion for the six months to December 2010 is still below the Mid Year “profile” of $37.4 billion. But at the end of the day the Government needs to achieve a full-year result of $41.5 billion. According to the budget estimates, it is revenues that need to improve markedly in the next six months while annualised expenses are expected to remain broadly unchanged.
What are the implications for investors?
- If there isn’t substantial improvement in the budget numbers over the next two months, the Government will be under pressure to come up with big spending or tax initiatives in the May budget. Still, if the Government is forced to tighten fiscal policy more significantly, it may allow the Reserve Bank to stay on the interest rate sidelines for longer.
- Further, if the budget deficit remains persistently large, the minority Government will come under renewed political pressure, adding to business and consumer uncertainty. Given the deterioration of the budget position under Labor in the early 1990s, the current Government is keen to display strong economic credentials. Still, the near term budget forecasts have been complicated by the floods and cyclone but the Government will need to hope the economy rebounds quickly in the second half of 2011.
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