Australian mid-year budget update: $23.6bn deficit, a $5.8bn upgrade - Westpac

Analysts at Westpac, note that Australian Federal Treasurer Morrison has released the Mid-Year Economic & Fiscal Update (MYEFO) and the economic growth forecasts (real and nominal GDP) have been rounded down for 2017/18 but are unchanged thereafter.

Key Quotes

“The 2017/18 budget deficit is projected to be $23.6bn, some $5.8bn lower than the May Budget forecast of $29.4bn. This is more than accounted for by a $6.9bn boost from revisions to the forecasts.”

“Over the four years to 2020/21, the cumulative deficit is $9.3bn less than expected in May, at $36.6bn currently.”

“The improved budget position is driven by revisions to the forecasts, providing a boost of $11.2bn, with revenues $2.4bn higher and expenses undershooting by $8.8bn. Higher company tax returns and better than expected superannuation tax receipts more than offset the impact of slower wages growth and softer economic growth in 2017/18.”

“The net impact of policy decisions is minimal, at a cost of $1.9bn across the forward estimates.” 

“The Government expects the budget to return to surplus in 2020/21, unchanged from Budget time.”

“The budget balance is forecast to improve from a deficit in 2017/18 of $23.6bn (1.3% of GDP) to a surplus in 2020/21 of $10.2bn (0.5% of GDP).”

“Real GDP growth was downgraded to 2.5% for 2017/18 (from 2.75%) and is unchanged at 3.0% for the remaining three years.”

“Nominal GDP growth was downgraded to 3.50% for 2017/18 (from 4.0%). The profile for the remaining years is unchanged, at: 4.0%, 4.5% and 4.75%.”

“Net debt and gross debt forecasts have been lowered. Gross debt in 2020/21 is now expected to be $583bn, 28.2% of GDP, $23bn lower than in May. Net debt as a share of the economy peaks in 2018/19, as before, but is $12bn lower, at $363bn, 19.2% of GDP.”

“As to risks around the real GDP growth forecasts, Westpac is a little more optimistic for 2017/18 at 2.75%, but expects the economy to slow down in 2018/19 to 2.5%, some 0.5% below the government and 0.75% below the RBA's forecasts. Downside risks are centred on consumer spending and home building activity.”

“On wages growth, the government still expects this to accelerate across the forecast period, albeit with the profile lowered by 0.25% each year to reflect the weaker starting position. The risk is that even this revised profile is too optimistic given ongoing structural headwinds.”