Australia: Federal budget contains little shift in the government’s overall fiscal stance - NAB
The analysis team at NAB explains that attempting to look through the “good” and the “bad”, at first blush this year’s Australian federal budget appears to contain little shift in the government’s overall fiscal stance as measured by key budget aggregates over the next couple of years, although it includes a more rapid improvement in the fiscal balance towards the end of the projection period.
Key Quotes
“Fiscal policy remains moderately contractionary over the four-year estimates period, although greater expenditure on infrastructure and education relative to the Mid-year Economic Outlook should have some positive impact on Australia’s long-term growth prospects.”
“The government has retained its forecasts for the underlying cash balance to return to surplus in 2020-21. This is despite slightly higher deficits in the next two years even with the boost from temporarily higher coal and iron ore prices. Compared with the Mid-Year Economic and Fiscal Outlook released in December 2016, the underlying cash deficit is marginally higher up to 2018-19, but then improves more rapidly in 2019-20 and 2020-21, in part as the haul from new revenue measures really starts to kick in.”
“In a departure from tradition, the Government is now also emphasising the operating balance, which aims to measure recurrent revenue less expenses and removes net capital expenditure. It is calculated on an accrual rather than cash basis. The operating balance returns to surplus slightly earlier in 2019-20, compared with a deficit of $1.3 bn at the time of MYEFO. Net capital expenditure, meanwhile is weaker than at MYEFO, but this reflects ‘parameter’ variations with actual policy decisions slightly positive. This measure does not capture all infrastructure spending.”
“While we take no issue with the government’s economic growth estimates for 2016-17 and 2017-18, we see downside risks to the projected 3% p.a. growth between 2018-19 and 2020-21. This rate of growth is higher than Treasury’s own estimate of potential growth for Australia of ~2¾% p.a. (although the government may argue that investment in infrastructure and education in this budget will be shifting that dial). NAB’s forecasts see real GDP growth of 2.9% in 2017-18 (similar to the Government’s 2.75% estimate) but only 2.4% in 2018-19, before growth reverts to our (lower) long-run growth estimate of ~2½% p.a. The government has sensibly taken a prudent approach to their forecasts for key commodity prices such as iron ore and coal, and hence the terms of trade. The government’s unemployment rate forecasts of 5¾% in 2016-17 and 2017-18 appear reasonable, although the government’s wage growth forecasts in the out-years of 3% to 3¾% continue to look overly strong.”
“Looking at the “parameter variations” versus “policy changes”, windfall gains from higher commodity prices in 2016-17 and particularly 2017-18 have largely been used to fund higher expenditure. Parameter variations account for much of the (very large) improvement in the budget balance in 2019-20.”
“The government is spending somewhat more freely in this Budget, projecting growth in payments to average 4.2% over the four years to 2020-21; while similar to estimated growth in 2016-17, this is higher than in the two prior years. As a percentage of GDP, payments are forecast to rise to 25.4% of GDP by 2018-19 before moving lower to 25% in 2019-20 (not significantly different, on average, to the 25.2% between 2016-17 and 2019-20 as at MYEFO).”
“Net government debt is expected to peak in 2018-19 at 19.8% of GDP, compared to the MYEFO estimate of 19% of GDP, and edges lower thereafter. Part, but not all, of the increase in net debt since MYEFO is due to changes in accounting standards. Net implied CGS issuance is expected to be $38 bn in 2017- 18, compared with $43 at MYEFO and $81 bn in 2016-17, with an outstanding face value at $537bn. Despite, all the talk of “good” and “bad” debt, pre budget, the emphasis remained on total net debt, but with added focus on the net operating balance.”
“Ultimately, all debt must be repaid, and ratings agencies will continue to focus on aggregate debt measures. While net debt is a bit higher than projected at MYEFO, partly due to accounting changes, with little change in the path back to surplus beyond 2017-18 and net debt projected to gradually decrease beyond 2018-19, our initial impression is that these figures will not alter Australia’s credit rating. Moody’s has noted that the Budget is consistent with the current AAA credit rating, and we expect S&P to retain the AAA rating with negative outlook.”