Governments are poor forecasters


With the Federal Budget for 2018-19 handed down, Lonsec takes a look at some time-honoured truths of government budget forecasting.

Governments tend to overestimate

Governments have a track record of overestimating receipts, especially when the economy is growing. But the latest budget may have bucked the trend, with company tax receipts estimated to be higher than previously anticipated, helped in no small way by higher commodities. It will be interesting to see if this estimate holds up in the next budget update.
Successive estimates of company tax receipts ($billion)


Source: Commonwealth Treasury, Lonsec

Forecasting is hard

While the mining investment boom is long gone, Australia remains a resource-dependent economy. Fluctuations in key commodity prices can have a significant impact on the budget bottom line. A fall in commodities such as iron ore can easily pull the rug out from under any government. Forecasting commodity prices is hard—but here’s why you have to try:

Impact on GDP and tax receipts of US $10 change in iron ore price ($billion)

Source: Commonwealth Treasury, Lonsec

A growing economy helps (especially for an election budget)

While income tax cuts and public infrastructure spending will be welcomed by voters and investors, it is interesting to see which parts of the budget are doing the heavy lifting. While expenses are coming down, revenue is on the up, boosted by economic activity over the March 2018 quarter, as well as a rallying commodities sector, which has lifted revenue above December’s MYEFO estimates.

Budget revenue versus expenses ($billion)

Source: Commonwealth Treasury, Lonsec

Infrastructure is a win for the economy and investors

The 2018-19 Budget has committed an additional $24.5 billion in infrastructure spending for the next ten years, taking the federal government’s total contribution to transport infrastructure to $75 billion. The Government has opened a range of investment opportunities to be delivered by, or in partnership with, the private sector and other levels of government.

“This is good news for the listed and unlisted infrastructure investors, including superannuation funds, given many private sector operators have a rich expertise in constructing, operating and maintaining large scale infrastructure projects,” said Libby Newman, Head of Manager Research at Lonsec. “Institutional investors, both from Australia and overseas, also favour having infrastructure as an asset class in their portfolio, especially Australian infrastructure, for its steady cashflows and income protection.”

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