Federal budget: Smallest deficit in four years

Federal Budget

• Final Budget outcome: The budget deficit for 2016/17 was $33.15 billion or 1.9 per cent of GDP. The budget deficit was a $4.4 billion improvement on the $37.6 billion deficit forecast just four months ago
• The budget data assists in forming a view of the economy and future monetary and fiscal policy decisions.

What does it all mean?

• The budget deficit is shrinking. A combination of firmer economic growth, and thus higher revenues, together with spending restraint have resulted in a deficit almost 12 per cent better (smaller) than that estimated at the May budget
• And while the outcome is favourable, there is still work to be done to achieve the government’s aim of a smaller surplus in four years’ time. Still, what is required is something akin to the conditions that existed in the mid-1990s when a combination of consistent economic growth and spending restraint pushed the budget back into surplus and led to government debt being paid off.
• Both sides of politics now need to focus on much-needed tax reform.

What do the figures show?

Federal Budget

• The Federal Budget was in deficit by $33.15 billion in the 2016/17 year or 1.9 per cent of GDP. Just four months ago, when delivering the 2017/18 Budget, Treasury had estimated a $37.6 billion shortfall. A better-than-expected result was assumed, based on the monthly financial statements released up to May 2017. The net operating balance was in deficit by $32.1 billion (1.8 per cent of GDP).
• The annual deficit was the smallest in four years. There has only been one smaller deficit in the past eight years. On a rolling monthly basis, the deficit was the smallest in 39 months.
• In terms of economic outcomes and assumption, the Government noted the following:
  • “Real GDP grew by 1.9 per cent in 2016-17, slightly stronger than the 1¾ per cent growth forecast in the 2017-18 Budget. There was a smaller-than-expected detraction from business investment and a stronger-than-expected contribution from public final demand, which offset weaker contributions from net exports and dwelling investment.
  • Tropical Cyclone Debbie is estimated to have detracted around ¼ of a percentage point from growth in the June quarter, with a significant impact on coal exports, in line with the 2017-18 Budget estimate. Almost 250,000 jobs were created over 2016-17 resulting in employment growing by 1.9 per cent through the year to the June quarter 2017, which was stronger than the 2017-18 Budget forecast of 1 per cent. The unemployment rate was 5.6 per cent in the June quarter 2017, slightly lower than the 5¾ per cent forecast in the 2017-18 Budget. Nominal GDP grew by 6.0 per cent, consistent with the 2017-18 Budget forecast, driven by a strong rise in Australia’s terms of trade.”
• In terms of movements in receipts and expenses, the Government noted:
  • “The Final Budget Outcome for 2016-17 was a $4.4 billion improvement compared with the underlying cash deficit estimated at the time of the 2017-18 Budget. Total receipts were $4.1 billion higher than expected and total payments were $1.2 billion lower than expected. Net Future Fund earnings were $860 million higher than expected at the time of the 2017-18 Budget.
  • In net operating terms, the Final Budget Outcome for 2016-17 improved by $6.6 billion compared with the net operating deficit estimated at the time of the 2017-18 Budget, with revenue $3.6 billion higher and expenses $3.0 billion lower than expected at the time of the 2017-18 Budget.”
• Government debt stood at $322.32 billion at the end of June 2017 or 18.4 per cent of GDP, up from $303.47 billion a year ago or 18.3 per cent of GDP.
• The Federal Government currently assumes a budget deficit in 2017/18 of $29.4 billion or 1.6 per cent of GDP and debt of $354.9 billion or 19.5 per cent of GDP. The estimates will be revised in November/December.

What is the importance of the economic data?

• The Final Budget Outcome is released by Federal Treasury and the Department of Finance late in September each year. The data provides a guide to how spending and taxing policies have performed. The data may have implications for the conduct of monetary policy.

What are the implications for interest rates and investors?

• The budget deficit is shrinking and it largely reflects increased taxes from businesses, GST receipts and superannuation fund tax receipts. Employment is rising and companies are making bigger profits and that means more taxes flowing into government coffers. Monetary policy doesn’t need to respond. The current level of interest rates is supportive of economic activity and the hope is that economic growth will quicken over the coming year to approach the “speed limit” near 3 per cent.
• The government debt to GDP ratio is smaller than expected and that raises the hope that the ratio may peak at lower levels than previously expected.
• With the budget in repair mode, all sides of politics need to switch their attention to tax reform. This will ensure that improvements in the budget bottom-line extend into the future – even with our ageing population – without the need for painful spending cuts