The federal government today released its much anticipated Economic Statement. This provides updated economic and fiscal projections, as well as costing for various policy initiatives.
Economic conditions are weaker than the government expected in their annual budget, released on May 14.
– Nominal GDP growth has been downgraded in 2012-13 (lowered by 0.75 per cent), 2013-14 (by 1.25 per cent) and 2014-15 (by 0.5 per cent), reflecting softer activity conditions and a weaker terms of trade. See Table 1.
– Our forecasts are broadly in line with those of the government for 2013-14 but we see risks for 2014-15 tilted to the downside.
– Revenue collections have been hit by the softer economic environment, with reductions of around $8 billion a year.
– The government remains committed to returning the budget to surplus in 2016-17. The Economic Statement forecasts an underlying cash surplus of $4 billion (0.2 per cent of GDP) for 2016-17, scaled back from a forecast $6.6 billion in the May budget.
– Net savings measures improve the budget position in 2015-16 and 2016-17, while policy decisions are broadly neutral in 2013-14 but add to the deficit in 2015-16. See Table 2 for details.
– The budget deficit is forecast to be $30.1 billion in 2013-14 (-1.9 per cent of GDP), representing a $12 billion deterioration from the May budget forecast.
– Net public debt is now expected to peak at a still relatively low 13 per cent of GDP in 2014-15, revised up from 11.4 per cent of GDP in 2014-15 in May.
A softer economic environment results in lower revenue collections for the Commonwealth. Revenue numbers are down by around $8 billion per year, for a four year impact of just over $33 billion. See Table 2 for details. Lower receipts are spread across: individuals' income tax, down $18.1 billion over the four years; company tax, some $9.7 billion lower; and capital gains tax, down $1.5 billion; as well as reduced resource rent taxes, $560 million lower across the four years.
The government's economic statement includes a number of savings measures, concentrated in the two out years. The net impact of policy measures is to add to the deficit slightly in 2013-14, adds to the deficit in 2014-15 (centred on changes the carbon pricing mechanism) and improves the underlying cash balance by $3.4 billion in 2015-16 and by $6.8 billion in 2016-17.
In the 2016-17 year, six key revenue measures raise $4.2 billion and four key expense measures save $2.4 billion
Receipts highlights (& 2016-17 impact), are:
1) Tobacco, increased excise, $2,410 million
2) Fringe benefit tax on cars, amendments, $960 million
3) Bank deposit insurance scheme, $325 million
4) Lost superannuation, $165 million
5) Offshore worker visa charges, $145 million
6) Unannounced decisions, $158 million
Payments highlights (and 2016-17 impact) are:
1) Public service cuts, $1042 million
2) Infrastructure spending bring forward, $252 million
3) Carbon price, reforms to Energy Security fund, $781 million
4) Unannounced decisions, $363 million
Australian general government net debt is estimated to be around $162 billion (10.6 per cent of GDP) in 2012-13. The peak in net debt is now forecast to be 13 per cent of GDP in 2014-15 ($212 billion), moderating to 12 per cent of GDP in 2016-17 ($218 billion). In the May Budget, net debt was forecast to peak at 11.4 per cent of GDP in 2014-15 ($192 billion), moderating to 10 per cent of GDP in 2016-17.
Monetary policy implications
The Economic Statement could have affected the policy debate and the outlook for policy decisions in two main ways.
Firstly, the initiatives and timing of the initiatives in the Statement could aﬀect the growth outlook through the change in the speciﬁc ﬁscal stance and the impact of the initiatives on business and consumer conﬁdence. Secondly, the forecasts in the Statement give us an updated view on the government's but not necessarily the Reserve Bank's, assessment of the economic outlook. For example in May the government forecast growth in 2013-14 at 2.75 per cent while the Reserve Bank forecast 2-3 per cent.
In the ﬁrst case we note that the savings initiatives are back end loaded. Net spend-save decisions in both 2013-14 ($373 million) and 2014-15 ($1607 million) represent modest ﬁscal injections. The big net spend-save initiatives are in 2015-16 ($3364 million) and 2016-17 ($6811 million) are major ﬁscal withdrawals. Consequently we can welcome the decision not to try to oﬀ set the important stimulatory eﬀect of the automatic stabilisers in the near term.
The only 'candidates' for markedly impacting consumer and business conﬁdence are the changes in FBT (car industry) and cigarette excise (consumers). The FBT changes unnerved business by signalling that other major tax changes could be in the pipeline. This has not proved to be the case so we expect that, while signiﬁcantly affecting one industry, the damage to business conﬁdence will not be widespread.
Similarly, consumers will be relieved that there are no more major tax changes and the interest rate cut we expect next week is likely to more than oﬀ set this tax change from the perspective of consumer sentiment. The government's assessment of the economic outlook has deteriorated only slightly. Growth in 2013-14 has been revised down to 2.5 per cent from 2.75 per cent but growth in 2014-15 has held at 3 per cent. We favour a growth forecast of 2.7 per cent in 2014-15, with downside risks. The one major adjustment in real growth is a downward revision to business investment in 2013-14 from 4.5 per cent to 1.5 per cent. We see that as being optimistic with our forecast of -2.5 per cent.
The unemployment rate is forecast to rise to 6.25 per cent in June 2014 (revised up from 5.75 per cent). This is largely explained by a rise in the participation rate rather than a marked slowing in employment growth. However it is notable that the government expects the rate to stay there in 2014-15 with 6.25 per cent forecast for June 2015 as well. That signals that the government, at least, sees no need for rates to be rising in 2014 – in accordance with our own view.
Our general take on the real sector forecasts is that the downward revisions have been minimal – we expect that the Reserve Bank will be more pessimistic on the growth outlook when it releases its forecasts on August 9. In summary, we see nothing in this Statement to change our current forecast interest rate proﬁle of three more cuts in August; November; and February next year to be followed by a long period of steady low rates.
Bill Evans is Westpac's chief economist. Andrew Hanlan is a Westpac senior economist.