Federal Budget back in the red

From

Monthly Financial Statements

  • Budget position: Just over a week ago the July and August financial statements were released by the Department of Finance. In this report we look behind the numbers.
  • Deficits return: In the twelve months to August 2019, the Budget deficit stood at $4,826 million (0.2 per cent of GDP).
  • Tax refunds: Over July and August, tax refunds have totalled almost $16 billion, up 31 per cent on the same period a year ago.

The monthly Budget figures can provide insights on the broader economy and policy settings. If fiscal settings are tight, the Reserve Bank may allow easier monetary settings.

What does it all mean?

  •  The Budget position has deteriorated in the past few months. In 2018/19 the Budget was broadly balanced (deficit of $690 million). In fact modest surpluses were recorded on a rolling annual basis in March and April. Now the deficit for the full 12-month period to August (rolling annual total) stands at $4,826 million or 0.2 per cent of GDP. Clearly the figures do bounce around from month-to-month but the trends are worth watching. Especially given expectation of a $7 billion surplus this year.
  • The finance boffins noted that the past two months have been characterised by “lower than expected revenue and higher expenses.” The tax refunds are flowing – in fact the payments are around $1 billion higher than expected by the Department of Finance. And election promises are likely to boost spending over the next few months. That is hardly negative – fiscal policy needs to complement the expansionary monetary policy in the current environment.

What do the figures show?

  •  In the twelve months to August 2019, the Budget deficit stood at $4,826 million. Over the same 12-month period to August, the fiscal balance was in deficit by $987 million with the net operating balance in surplus by $5,202 million.
  • Smoothed revenues (twelve months to August) were up 8.6 per cent on a year ago – the slowest growth in 14 months. Smoothed expenses were up by 4.9 per cent.
  • Annual company tax collections are up 8.7 per cent over the year after recording double-digit annual results over 2017/18 and 2018/19. Net individual tax is up 4.1 per cent. But tax refunds are up 12.7 per cent on a year ago.
  • In terms of expenses, health spending is up 12.4 per cent while public debt interest is actually down 1.1 per cent, the first decline for over three years (39 months).
  • The Department of Finance noted: “The net operating balance for the year to 31 August 2019 was a deficit of $8,418 million, which is $2,836 million higher than the 2019-20 Budget profile deficit of $5,582 million. The difference results from lower than expected revenue and higher expenses.”
  • In terms of the underlying cash balance, “The underlying cash balance for the financial year to 31 August 2019 was a deficit of $9,669 million, which is $664 million higher than the 2019-20 Budget profile deficit of $9,005 million.”
    • Receipts: “Total receipts were $456 million lower than the 2019/20 Budget profile.”
    • Payments: “Total payments were $146 higher than the 2019/20 Budget profile.”
  • Federal Treasury and the Department of Finance currently expect an underlying surplus of $7,054 million for 2019/20.
  • In terms of the fiscal balance the Department of Finance noted: “The fiscal balance for the year to 31 August 2019 was a deficit of $8,097 million, which is $1,853 million higher than the 2019-20 Budget profile deficit of $6,243 million. The difference results from lower than expected revenue, higher expenses and lower net capital investment.”
  • Receipts from the Goods and Services Tax stood at $66,493 million in the twelve months to August, up 0.5 per cent on a year ago and down from the record $67,574 million in receipts for the year to December 2018.
  • Actual GST receipts for the two months to August stood at $12,756 million, just above the Budget ‘profile’ of $12,674 million.

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?

  •  Those calling for less restrictive fiscal policy in the current environment have their wishes granted. Expenses are growing at the fastest annual pace for 4½ years. Revenues are still outpacing growth of expenses but the gap is narrowing.
  • Tax refunds are flowing. Over July and August tax refunds totalled almost $16 billion, up almost $4 billion (31 per cent) on the same period in 2018. Over 2018/19, refunds are tipped to be $36.9 billion, up $7.4 billion or 25 per cent on a year ago. Now the question is what proportion of refunds is spent, saved or used to pay down debt.

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