Shane Oliver

As broadly foreshadowed in recent media, the Mid-Year Economic and Fiscal Outlook projects a budget deficit this financial year of $47bn (up from $30bn projected prior to the election) and a declining deficit out to 2023-24 at least (whereas previously a return to surplus was projected by 2016-17).

The current year’s budget blowout partly reflects the $8.8bn recapitalisation of the RBA, but a big driver of the worse budget outlook is downwards revisions to nominal growth assumptions in the economy which means less revenue growth.

Since not much has changed economically since the Pre-Election Fiscal Outlook four months ago  – if anything the global outlook has improved a touch and Australian economic data has been a bit better – the size of the downgrade to the nominal growth assumptions is surprising.

I suspect it owes a bit to the new Government wanting to paint as bleak a picture as possible from which they can then implement a turnaround, ie, get the bad news out up front.

That said there is no denying that Australia faces a long term challenge to get its budget deficit back under control now that the tail wind from the first two phases of the mining boom are behind us and as we start to see the impact of the aging population on health and welfare spending

The bad news on the budget clears the way for significant spending cuts in the May budget, which are likely to focus on welfare, health and possibly education.

The big risk of course is that the bad news on the budget coming hot on the heels of news that Holden will quit manufacturing beyond 2017 damages confidence during the important Christmas retail sales period.

All of which means that the risk for interest rates remain on the downside.

Finally, note that Australia’s budget deficit at 3% of GDP this year then falling and Federal net debt peaking at 16% of GDP  are low versus the US (net debt is at 87% of GDP), the Eurozone (net debt at 75%) and Japan (net debt at 144%).

The trouble is that after the biggest boom in history our public finances should have been in better shape. We should have put more aside in surpluses during the commodity price boom years up to 2008 and cut government spending back faster from 2010.

The post Australia’s Federal Budget deteriorates yet again appeared first on AdviserVoice.

What do the figures show?

• The underlying budget deficit for the twelve months to April stood at $32.332 billion, the lowest annual deficit in 44 months and a $11.4 billion improvement (26 per cent) on the full-year 2011/12 result. In April 2013 the monthly surplus was $13,262 million – the biggest surplus for an April month on record.
• Smoothed revenues (year to April) were up 5.6 per cent on a year ago – the slowest annual growth rate in 23 months. Expenses grew by 3.9 per cent over the same period – just above the slowest growth pace in 16 months. The Government had previously projected 10.5 per cent growth of revenues in 2012/13 with expenses to fall by 0.7 per cent.
• The Government noted: “The underlying cash balance for the 2012-13 financial year to 30 April 2013 was a deficit of $16,337 million compared to the Mid-Year Economic and Fiscal Outlook (MYEFO) profiling Year to Date (YTD) of the underlying cash balance deficit of $6,056 million. The difference of $10,282 million is primarily driven by lower tax receipts.”
• Receipts from the Goods and Services Tax stood at $50.277 billion in the twelve months to April, up 2.2 per cent on a year ago. In the Mid-Year review the government projected GST revenues of $50.79 billion for 2012/13 and projected $50.22 billion in revenues in the May budget.

What is the importance of the economic data?
The Department of Finance and Deregulation release 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 does it all mean?

• The latest data confirm that the government financial accounts are moving in the right direction. But as the Government highlighted at budget time, improvement is occurring at a far slower pace than originally envisaged because of weak growth of tax revenue.
• Tax revenues should lift over 2013/14 provided that the global economy continues to heal as expected, the Aussie dollar softens (meaning less goods price deflation) and cost-cutting and productivity measures across Australian businesses serve to lift profitability.
• The good news in the latest accounts is that GST revenues are tracking in line with forecasts. So while company profits have been soft, receipts from sales have performed as expected.

The post Smallest Budget Deficit in almost four years appeared first on AdviserVoice.

What do the figures show?

• The underlying budget deficit for the twelve months to February stood at $37.99 billion, the lowest annual deficit in nine months and a $5.75 billion improvement (13 per cent) on the full-year 2011/12 result. In February 2013 the monthly surplus was $3,165 million – the biggest surplus for a February month in a decade.
• Smoothed revenues (year to February) were up 6.7 per cent on a year ago – the slowest annual growth rate in 20 months. Expenses grew by 4.0 per cent over the same period – the slowest growth in 13 months. The Government has projected 10.5 per cent growth of revenues in 2012/13 with expenses to fall by 0.7 per cent.
• The Government noted: “The underlying cash balance for the 2012-13 financial year to 28 February 2013 was a deficit of $23,646 million compared to the Mid-Year Economic and Fiscal Outlook (MYEFO) profiling Year to Date (YTD) of the underlying cash balance deficit of $17,933 million. The difference of $5,713 million primarily relates to lower taxes received and higher personal benefit payments, partially offset by lower payments for goods and services.”
• Receipts from the Goods and Services Tax stood at $49.19 billion in the twelve months to February, down 0.7 per cent on a year ago, equalling the biggest annual decline in three years.

What is the importance of the economic data?

• The Department of Finance and Deregulation release 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 does it all mean?

• It’s still a long way short of a surplus, but the budget position continues to slowly improve. The good news is that the annualised deficit stands at 9-month lows while the deficit only represents 2.6 per cent of GDP, substantially better than most major economies such as the US (5.8 per cent of GDP), Japan (9 per cent) and UK (7.8 per cent).
• The bad news is that revenues are over $6 billion short of where the bean-counters had expected to be at this point. And little improvement is expected in corporate profitability until later this year or early 2014.
  Flat GST revenues are a concern for state government treasuries.

The post Smallest budget deficit in nine months appeared first on AdviserVoice.