The Budget helps preserve Australia’s AAA credit rating, will not detract from economic growth through 2013-14 and is better than its predecessors under the current government in that expenditure savings and tax increases will come into effect ahead of medium-longer term spending initiatives. The budget is also predicated on credible economic forecasts (in my view too pessimistic forecasts over the next 12 months).
Starting with the sovereign credit rating, the estimated underlying deficit in the current financial year of $19.4bn or -1.3% of GDP is a goal that Australia’s peers will not achieve in the next 5 years. The forecast budget deficits of $18.0bn, or -1.3% of GDP, in 2013-14 and $110.9bn, or -0.6% of GDP, in 2014-15 are numbers Australia’s peers can only dream about in the next 10-20 years. These low budget deficit numbers are in a league of their own amongst developed nations. Net government debt also peaks at $191.6bn, or 11.4% of GDP, in 2014-15 on the budget figures, again a number way below where a rating agency would issue any caution, let alone a downgrade.
Concerning the impact on economic growth over the next 12 months or so, the quick measure is the change in the underlying deficit, it contracts or cuts into aggregate spending by only $1.4bn, about 0.1% of annual GDP in 2013-14. The fiscal drag on the economy comes in later years when the large majority of tax changes and spending cuts start. For example, the 0.5% hike in the Medicare levy does not start until 1 July 2014 and the proposed change to the baby bonus is still 9 months away.
The big and mostly pre- announced spending changes in the budget – Gonski education spending, NDIS and road and rail infrastructure plans all start more than a year down the track and after tax increases and spending cuts start to take effect. This is where the Budget is unusual, particularly for one ahead of an election.
On the economic forecasts underpinning the Budget forecasts, my view is that 2.75% GDP growth for 2013-14 will probably be too low. I see household consumption and housing activity running more strongly than Treasury is forecasting providing a more substantial offset to weaker resource investment investment spending. I am also more optimistic about the global economy than Treasury. If I am right, budget numbers through 2013-14 will start to surprise positively as the financial year progresses.
One big proviso with the Budget is that some of it may have a short shelf life if as seems likely the Coalition wins the September 14 election. The post election mini budget, probably in November or December, will then become the key. There is no reason at this stage to expect anything too far different from last night’s Budget, at least in terms of the rough order of future underlying deficits.
All told we do not see the Budget changing the favourable outlook for risk assets, or the view of the RBA – an easing bias persisting for the next few months, but probably no further rate cut given the stronger turn in local economic readings.