Budget worsens: In the twelve months to December 2015, the budget deficit stood at $42.0 billion (around 2.5 per cent of GDP), up from $40.7 billion in the year to November and the highest rolling annual deficit in seven months.
Higher-than-expected spending: The Department of Finance notes that the deficit is $763 million above the ‘profile’ forecast to date due to “higher than expected cash payments, partially offset by higher than expected cash receipts”.
What does it all mean?
The Federal Government is finding it hard to lift revenue, so the natural response would be to keep spending under control. And the latest figures show that this is precisely what is happening. Expenses in the full 12-month period to December (2015 calendar year) were $421.7 billion, down 0.7 per cent on a year ago. The last time that expenses fell over a 12-month period was almost a decade ago, in mid-2006.
While expenses are going backwards, rolling annual revenue is struggling to grow, up just 1.4 per cent in 2015 on the previous year. As a result, the annual Budget deficit is seemingly becalmed near $42 billion. The budget deficit is not abnormally high near 2.5 per cent of GDP, but there are few signs of it narrowing any time soon.
The Treasurer is right to focus on the need to shift reliance away from personal income tax to increased reliance on taxation of spending (GST). With the ageing population, the aim in coming years should be to encourage more people into the workforce and increase productivity. If the personal income tax is lowered then this will encourage more people to take on jobs with an incentive to work harder, longer and smarter to reach higher incomes. An increased GST would allow States and Territories to have consistent access to more funds and allow the Federal Government to reduce support payments to the states. Lower income tax/higher GST would give employees greater choice about how they generate income and how much they want to spend.
What do the figures show?
The underlying budget deficit for the twelve months to December 2015 stood at $42.0 billion. The rolling annual deficit fell to $37.87 billion for the year to June but has edged up to $39-42 billion over the past five months.
Smoothed revenues (twelve months to December) were up 1.4 per cent on a year ago, below the average growth of 2.2 per cent over the past year. Expenses fell by 0.7 per cent over the same period, the slowest growth in almost a decade (year to May 2006).
The Department of Finance noted: “The underlying cash balance for the year to 31 December 2015 was a deficit of $35,488 million, compared to the 2015-16 Mid-Year Economic and Fiscal Outlook (MYEFO) profile deficit of $34,725 million. The difference of $763 million primarily relates to higher than expected cash payments, partially offset by higher than expected cash receipts.”
In terms of the fiscal balance, the Department of Finance noted: “The fiscal balance for the year to 31 December 2015 was a deficit of $28,529 million, compared to the MYEFO profile deficit of $31,515 million. The difference of $2,986 million relates to higher than expected revenue and lower than expected expenses
Revenues: Total revenue was $1,758 million higher than the MYEFO profile, primarily due to higher than expected taxation revenue.
Expenses: Total expenses were $1,228 million lower than the MYEFO profile, primarily due to lower supply of goods and services, and wages and salaries expenses.
The Government currently expects an underlying deficit of $37.4 billion for 2015/16 (around 2.3 per cent of GDP).
Receipts from the Goods and Services Tax stood at $56.96 billion in the twelve months to December, down less than 0.1 per cent on a year ago. The Government has forecast GST receipts of $59.79 billion for the entire 2015/16 year.
Actual GST receipts for the six months to December stood at $29.754 billion, close to the Budget ‘profile’ of $29.686 billion.
What is the importance of the economic data?
The Department of Finance releases the Government Financial Statements (Niemeyer Statement) almost every month. The statement allows investors to track the current budget position and provides insights into the effectiveness of fiscal policy.
What are the implications for interest rates and investors?
The Federal Budget position is seemingly becalmed, keeping the focus on monetary policy to provide direction for the economy.
The Government must remain focussed on tax reform to address medium-term challenges for the economy.
The Government is showing restraint on spending at present, constraining stimulus to the economy.
The better-than-expected job market is providing a boost to the economy in terms of higher tax revenue.
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