Government ministers have been indicating since late 2012 that the 2012/13 Budget outcome was likely to be a deficit. So, this week’s news was no surprise.
- The Prime Minister confirmed it today by implying that the deficit (the underlying cash balance) would be around the $11bn level, or 0.7% of GDP. The most recent forecast, in October’s Mid‑Year Economic and Fiscal Update (MYEFO), was for a small surplus of $1.1bn or 0.1% of GDP. But there was little new detail for the markets. We will have to wait till 14 May, Budget night.
- The shortfall in company tax revenues is seen as the main problem by the Government. The MYEFO had company tax in 2012/13 at $71.2bn, which was a $2.3bn downgrade from MYEFO. Whereas it now looks as though company tax will be even lower. The tax shortfall is being driven by a higher than expected Australia dollar (AUD) combining with lower commodity prices to weaken taxable profits of Australian corporates.
- To put the revenue numbers in perspective, the Federal Government MYEFO forecast had total 2012/13 cash receipts at $367 bn or 24.0% of GDP. Company tax, at $71.1bn, is only 20% of total revenue. In comparison, personal income tax, at $160bn, is 45% and was unchanged from the MYEFO forecast. At first glance, it would appear that a small change to personal income tax arrangements could cover the company tax shortfall.
- The nominal economy, which determines the growth in the tax base and collections, is growing at a slower pace than previously expected. Today’s update implies that nominal GDP growth in 2012/13 could be near 3% compared to the 4.2% expected in the MYEFO and 5.1% in last year’s Budget. The high AUD, weaker company profits and flat property markets are all part of the weaker revenue picture. Note that personal tax receipts, which depend on jobs and wages growth, were revised down marginally in the MYEFO to $174.5bn. The jobs market looks to be in better shape than ABS data indicates.
- The Government’s problems with the Budget are also due, in part, to their own spending decisions. The outlays side of the Budget has not been pared back in line with the slide in revenues. MYEFO had total outlays at $363.2bn, or 23.8% of GDP. Measures to make “savings” or cut expenditure leakages have not been sufficient to bridge the widening gap. It partly reflects the political problems of minority Government, with all decisions, especially “cuts” subject to the approval by those with the balance of power in the Lower and Upper Houses.
- The 2013/14 May Budget will be mainly about how to fund the “big ticket” reforms such as education and the NIDS, within the constraints imposed by the new normal of weak revenue growth. On State revenue issues, the Prime Minister today ruled out any changes to the GST.
- There is not much talk about future deficits. There is still an intention to produce Budget surpluses in the future, “over the course of the business cycle”. But ongoing modest deficits look to be reasonably likely without a mixture of deeper spending cuts and tax increases. The latter may involve the “winding back” of personal and company tax concessions.
- The proximity of the 14 September election means that there will be another fiscal update, the Pre‑election Economic and Fiscal Outlook (PEFO), ten days after the writ for the election is issued.