Don’t fall for the spin - Scott Morrison’s budget surplus is no certainty

Thu, 06 Dec 2018  |  

This article first appeared on the Yahoo Finance web site at this link: https://au.finance.yahoo.com/news/dont-fall-spin-scott-morrisons-budget-surplus-no-certainty-224422761.html 

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Don’t fall for the spin - Scott Morrison’s budget surplus is no certainty

Prime Minister Scott Morrison could yet be guilty of prematurely declaring that his government will deliver a budget surplus in 2018-19.

Sure, tax revenue is growing at a rapid pace and the government is underspending on a range of government services, but there are still seven long months to go between now and the end of the financial year that might yet blow up the surplus commitment.

PM Morrison’s ‘return to surplus’ boast is based, it appears, on hard data for the first four months of the 2018-19 financial year on revenue and spending information from the Department of Finance. These numbers do look strong, at least in terms of the budget numbers and if the trends on revenue and spending continue, the budget will probably be in surplus. Treasury will be factoring in ongoing economic growth, no increase in the unemployment rate and buoyant iron ore and coal prices over the remainder of the financial year. These forecasts and hence the budget bottom line are subject to a good deal of uncertainty, as they are every year.

If, as is distinctly possible, the economy stalls in the March and June quarters 2019, commodity prices continue to weaken and if there are some unexpected increases in government spending, the current erroneous forecasts for revenue and spending could leave the budget in deficit.

It is a dangerous game. Politically at least.

Economies and budgets can alter very quickly as a run of uncertain news and events impact on consumers and the business sector. Global shocks come jump out to derail even the best forecasts. Clearly, a lot can change for the budget between now and the Treasurer handing down of the budget on 2 April 2019 Budget.

Even more can change between when the budget is handed down and when the financial year comes to an end on 30 June 2019. This gap alone is a further three months of news that can have a material and unexpected impact on the budget bottom line.

Government spending in 2017-18 will be around $475 billion, a similar number to total revenue. A 1 per cent forecasting error on either revenue or spending could cost the budget close to $5 billion. And 1 per cent forecasting errors have occurred in the past. Mr Morrison’s proud announcement of a surplus seems risky, but it may be a political plus for the beleaguered government. Part of the electorate thinks that the budget balance is a measure of economic management competence and a surplus will be seen, by them, as good news.

But there is a twist.

The final budget outcome for 2018-19 – whether it is in surplus or deficit – will not be known until September 2019, some four months after the voters have made their decision. This means that in the event of a shock Coalition win at the election, the budget could ‘surprisingly’ drop back into deficit but, perhaps ironically, Mr Morrison will still be Prime Minister despite the failure to deliver on his promise.

At the macroeconomic level, there is very little difference between a budget deficit of a billion dollars or two and a surplus of a billion dollars or two. Recall annual GDP in Australia is close to $2 trillion.

But politically, the surplus / deficit issue can be important particularly when the surplus the government says it is delivering cannot be checked until after the election, even though it may sway a few voters to give their vote to the Coalition.

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Don’t look now – you are almost certainly poorer than a year ago

I am sorry to kick off the new year with some gloomy news of your finances.

It is never nice to discuss how much money you have lost, but if you are a home owner in Sydney, Melbourne, Perth or Darwin and if you have a superannuation nest egg, the odds are you are less wealthy today than you were a year or two ago.

Here are some uncomfortable facts.

The Australian stock market, where the bulk of your superannuation assets are likely to be invested, has slumped 11 per cent since August, reducing the value of stocks by around $200 billion.  No doubt your superannuation has suffered part of this loss.

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Falling dollar reflects global concern all is not well in the Australian economy

Mon, 07 Jan 2019

The article first appeared on The Guardian website at this link: https://www.theguardian.com/business/2019/jan/03/falling-dollar-reflects-global-concern-all-is-not-well-in-the-australian-economy 

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Falling dollar reflects global concern all is not well in the Australian economy

The Australian dollar was hit hard overnight, Australian time, slumping below 70 US cents before a sharp and more extreme move saw it temporarily crash to a low of 67.40 US cents. It subsequently recovered marginally, but remains weak at around 69.40 US cents.

Rather than focus on the micro aspects of minute-by-minute or hour-by-hour moves in the dollar, which can be more noise than substance, the trend for the dollar over the past year has been down.

In January 2018, the Australian dollar was trading at 81.50 US cents.

There is increasing concern from global investors that all is not well with the Australian economy. Policy is in a do-nothing phase. Entrenched low wages growth is hampering growth in household spending. This is being complemented, in a negative way, by a sharp fall in wealth as house prices drop and the share market weakens, both of which will be a negative for the economy during 2019. This is because householders are simply not getting the income growth nor wealth accumulation needed to allow them to keep spending at a rate that will see the economy expand at a pace that will generate upside wage and inflation momentum. Strategies aimed at reducing debt and paring back new borrowings mean, by definition, weaker economic growth over the near term.