Budget deficit: $30 billion smaller than forecast

From

Monthly budget statement

  • The Monthly Financial Statements for March 2021 report the budget position against the expected monthly profile for the 2020/21 financial year through to 31 March 2021.
  • Over the full twelve months to March the budget deficit was $196.17 billion or 9.8 per cent of GDP.
  • The underlying cash balance for the 2020-21 financial year to 31 March 2021 was a deficit of $133.3 billion against the MYEFO (mid-year) profile deficit of $162.7 billion.
  • The budget deficit for the nine months to March was $29.5 billion lower than the ‘profile’ deficit.
  • Over the past year, public debt interest totalled $16.671 billion, just off the smallest rolling annual result in 3½  years.

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?

  • Over the full twelve months to March the budget deficit was $196.17 billion or 9.8 per cent of GDP. Only 19 months ago the budget was broadly balanced. This shows the magnitude and swiftness of the fiscal response to Covid-19. The budget deficit is large but arguably the money has been well spent given the strong position of the economy.
  • According to the Federal Government bean counters, the budget deficit is running just under $30 billion below where they expected it to be. So far, the Government has spent around $13 billion less than expected. In addition, Government receipts are around $17 billion higher than expected. As a result the Federal Government has scope to provide further assistance to consumers and business as needed.
  • The budget deficit may have soared but the servicing cost is actually near 3½-year lows – courtesy of rock-bottom interest rates. If you had to borrow, now is the time to be doing it.

What do you need to know?

  • In the full twelve months to March 2021, the Budget deficit stood at $196.17 billion (9.8 per cent of GDP).  According to the Mid-Year review, the underlying cash balance for the full year (2020/21) is expected to be a deficit of $197.7 billion (9.9 per cent of GDP).
  • Smoothed revenues (twelve months to March) were down 2.1 per cent on a year ago, just short of the biggest decline in 9½ years. Smoothed expenses were up by 37.7 per cent, the fastest growth since monthly records were published.
  • Annual company tax collections fell by 2.2 per cent over the year to March, the smallest decline in 11 months and a marked improvement on the 10 per cent decline in the year to October 2020.
  • Net individual tax is actually up 2.2 per cent over the year. Tax refunds are now falling at a 0.8 per cent annual rate after rising 23 per cent in the year to April 2020.
  • In terms of expenses, Social Security & Welfare spending was up 23.2 per cent, after rising at a 28.4 per cent rate in February – the fastest rate in almost 11 years (since the global financial crisis). But public debt interest was down by 1.3 per cent.
  • The Department of Finance noted in terms of the underlying cash balance: “The underlying cash balance for the financial year to 31 March 2021 was a deficit of $133.3 billion, which is $29.5 billion lower than the 2020-21 MYEFO profile deficit of $162.7 billion..”
    • Receipts: “Total receipts were $16.9 billion higher than the 2020-21 MYEFO profile.”
    • Payments: “Total payments were $12.6 billion lower than the 2020-21 MYEFO profile.”
  • In terms of the fiscal balance the Department of Finance noted: “The fiscal balance for the year to 31 March 2021 was a deficit of $134.0 billion, which is $30.3 billion lower than the 2020-21 MYEFO profile deficit of $164.3 billion. The difference results from higher than expected revenue, and lower than expected expenses and net capital investment.”
  • In terms of the operating balance the Department of Finance noted: “The net operating balance for the year to 31 March 2021 was a deficit of $130.8 billion, which is $27.8 billion lower than the 2020-21 MYEFO profile deficit of $158.6 billion. The difference results from higher than expected revenue and lower than expected expenses.”
  • Receipts from the Goods and Services Tax stood at $67,215 million in the 12 months to March, only just down from the record $67,801 million in the twelve months to April 2020. GST receipts are down 0.5 per cent on the year (full year receipts are forecast at $65,750 million).
  • Actual GST receipts for the nine months to March stood at $53,390 million, $4.1 billion above the Budget ‘profile’ of $49,303 million.

What is the importance of the economic data?

  • The Department of Finance releases the Government Financial Statements (Niemeyer Statement) on the last Friday of 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 investors?

  • Every level of government and the Reserve Bank have been doing ‘all that it takes’ to support the economy. But the smaller-than-expected Federal spending may suggest that not all the payments are getting out the door. But it also confirms that economic recovery is stronger than expected. And again it may mean that there hasn’t been the expected take-up of assistance.
  • Despite the biggest budget deficit since World War II, debt interest payments haven’t really budged on a year ago.
  • At present the focus has to be in terms of supporting the economy while addressing high debt levels later – especially with government borrowing costs and interest repayments at such low levels.
  • The Government has confirmed that this is indeed the strategy – to get more people in jobs and to promote higher wages. A lift in wages also means higher prices, serving to support company revenues.
  • The focus now shifts to the May 11 Federal Budget.

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