2019-20 budget will be 'problematic': here's why

Wed, 20 Feb 2019  |  

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/2019-20-budget-will-problematic-heres-194957605.html 

------------------------------------------------------------

2019-20 budget will be 'problematic': here's why

Word has it that the framing of the budget, due to be handed down by Treasurer Josh Frydenberg the day after April fools day (and around 6 weeks before the election), is more problematic than usual.

Problematic because there is some mixed news on the economy that will threaten the current forecast of a return to budget surplus in 2019-20.

Housing has gone into near free-fall, both in terms of prices and new dwelling approvals. This is bad news for GDP growth.  The unexpected severity of the housing slump is the key point that will see Treasury revise its forecasts for GDP growth, inflation and wages lower when the budget is handed down.

It will be impossible for Treasury to ignore the recent run of hard data, including the weakness in consumer spending and a generally downbeat tone in the recent economic news when it sets the economic parameters that will underpin its estimates of tax revenue and government spending and therefore whether the budget is in surplus or deficit.

By themselves, these changes are enough for an independently compiled set of forecasts for 2018-19 and 2019-20 to see the budget remain in deficit.

The Reserve Bank of Australia released a comprehensive set of up-to-date forecasts two weeks ago, in the quarterly Statement on Monetary Policy. These forecasts were surprisingly upbeat and optimistic compared with the recent run of news, but they were materially weaker than the latest Treasury forecasts from December 2018 which underpinned its estimate of a return budget surplus in 2019-20. The latest RBA forecasts for GDP growth are 0.25 per cent lower than those of Treasury in both 2018-19 and 2019-20. This does not sound like a big difference, but 0.25 per cent of GDP is around $5 billion a year, in current price terms. The weaker growth rate will undermine estimates of tax revenue if Treasury uses similar forecasts to the RBA’s.

Importantly, the RBA forecasts for inflation are a huge 0.75 per cent and 0.25 per cent lower, respectively, than the Treasury forecasts. Lower inflation means lower GST revenue, although there is a slight offset with lower indexation of some government payments. The RBA forecasts for wages growth in 2019-20 is 0.5 per cent lower than Treasury’s forecasts. This will mean lower income tax payments, slower spending growth and softness in other revenue for the government.

The only areas which may provide something of an offset to the generally weaker economic climate is a slightly stronger growth rate in employment as outlined by the RBA and unexpected increases in some commodity prices.

Deficit forecast likely for 2019-20

These events are helpful to estimates of revenue but are unlikely to be enough to stop Treasury from forecasting a deficit in 2019-20. There is simply too much bad news.  The rule-off date for the budget numbers will be around 26 March, a few days before the budget documents go to the printer.

Between now and then, there will be a flurry and new information on the economy which will impact the final Treasury budget forecasts. Data on wages, GDP, employment, retail spending, house prices, dwelling construction, business investment and news from the global economy could yet turn out to be positive, but more likely, the run of disappointing news will continue.

The government will be hoping that the run of data at least consolidates and doesn’t get any weaker.

If there is in fact a run of weak numbers, even the RBA forecasts will need to be revised lower and with that, will go hopes of a return to budget surplus in 2019-20.

This would be a huge blow to the government, already miles behind Labor in the opinion polls, especially as it is hoping to campaign on economic management as the election draws near.

comments powered by Disqus

THE LATEST FROM THE KOUK

The weak economy is turning higher

Mon, 15 Jul 2019

This article first appeared on the Yahoo Finance web site at this link: https://au.finance.yahoo.com/news/just-how-weak-australia-strong-economy-213520159.html 

----------------------------------------------

The weak economy is turning higher

In the space of a couple of months, the rhetoric on the economy has gone from strong to weak.

Curiously, both assessments are wrong.

The economy was actually weak during the first half of 2019 and, if the leading indicators are correct, late 2019 and 2020 should see a decent pick up in economic activity.

It is not clear what has caused this error of judgment and the about face from so many commentators and economists, including importantly the Reserve Bank. A level-headed, unbiased look at economic data confirms that in late 2018 and the first half of 2019, the economy was in trouble. There were three straight quarters of falling GDP per capita, house prices were diving at an alarming rate, there was a rise in unemployment, wages growth remained tepid and low inflation persisted.

These are not the dynamics of a “strong” economy.

Only now, in the rear view mirror look at the economy, are these poor indicators gaining favour, leading to generalised economic gloom.

Australia needs ‘fiscal stimulus', but what does that actually mean?

Wed, 10 Jul 2019

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/australia-needs-fiscal-stimulus-but-what-does-that-actually-mean-203000918.html 

------------------------------

Australia needs ‘fiscal stimulus', but what does that actually mean?

With the economy down in the dumps and the per capita recession now extending to nine months, there is a frenzied call for the government to implement some spending and tax policies to stem the bleeding.

The calls are coming from economists, journalists, the RBA Governor and a bevy of commentators who are demanding a fiscal policy boost from the government to support economic growth. This is all fine and there is a strong case for policy makers to work together to do something to lift the pace of economic expansion.

But there is a problem with the generic “fiscal policy stimulus” demand given that none of the calls have been accompanied by even vague details of what the stimulus means and the areas of spending that should be ramped up or what taxes should be changed.

Sure, there is a suggestion of more spending on ‘infrastructure’ but that is never defined or specified.