Upon Prime Minister Scott Morrison’s announcement of the MYEFO date back in November, Nest Egg spoke with two leading economists to find out their predictions of what would be included in the outlook.
Here, we catch up with them again to hear their analysis of what was unveiled and their fresh predictions for the April budget.
The numbers: Do they stack up?
According to AMP Capital chief economist Shane Oliver, the standout announcement to come out of the MYEFO was the stronger than expected position of the budget.
In a statement accompanying the outlook announcement, the government revealed, “over the next four years, the cumulative estimated surplus will be nearly double the estimate in this year’s budget, with underlying cash surpluses increasing to $12.5 billion in 2020-21 and $19.0 billion in 2021-22.”
Mr Oliver says although this position is well-received, as governments have been pushing towards surplus for some time now, there are concerns that forecast budgetary surpluses rely heavily on the current conditions of job growth and high commodity prices.
“Obviously, that improvement is welcome because we’ve spent also a decade now trying to get back to surplus,” he said.
“So, in that sense it’s good news.
“However, the budget has actually improved despite wages not picking up because of stronger employment and stronger commodity prices, which has boosted company tax revenue.
“There is a danger that those two things won’t be sustained – that jobs growth may slow down, leading to lower personal tax collections, and that commodity prices will fall back down.
“If those things happen, then, obviously, that will see the budget numbering look a lot worse going forward.”
He said this dependency on employment rates and strong commodities is a risk heading into an election year budget, as any pre-election “sweeteners” offered on the basis of this growth might cause a strain should the economy experience downturn.
“I think that when you allow for those two things, [a drop in employment and commodity prices] there is a risk is that the revenue numbers prove too optimistic and we end up at some point with lower revenue coming in,” Mr Oliver said.
“When you put that together with the stimulus measures, that may turn out to be more than the $3 billion per year that the government has allowed in the MYEFO, the budget numbers may actually deteriorate from here.”
Mr Oliver says the government is likely acknowledging the need to be cautious regarding the scope of a surplus delivered on the back of market factors by being conservative on tax cut predictions.
“I was assuming a little bit more [in tax cuts] than was in the budget,” he said.
“I was assuming about $8 to $9 billion a year in tax cuts. Whereas the government is only budgeting for about $3 billion a year.
“I think they’re just being cautious.
“They probably didn’t want to be too optimistic about the extra revenue they’re going to get, so they are assuming that iron ore and coal prices will drop back down.
“So, I think they’ll probably wait until next year when, fingers crossed, if they can, they’ll revise the numbers up again and that will give them more scope to provide bigger tax cuts.”
Mr Oliver said it is likely also that the government is holding back on passing on further tax cuts as a showcase of fiscal responsibility to the Australian public.
“At the moment, they’ve budgeted for $3 billion dollars per annum over the three years to 2021-22 starting next year, and they’ve let $2 billion worth of savings go to the budget bottom line,” he said.
“Given the assumptions they have adopted, [it is likely] they didn’t want to give too much away because they wanted to show that their budget surplus projection for the next financial year has gone from $2.2 billion to $44.1 billion, which is near double what it previously was.
“If they give more away, say we pencil in $5 billion of tax cuts, then they might worry that they will be criticised because they’re still levying a budget surplus at a very low level.
However, Mr Oliver said the issue with the current forecast tax cuts is that the promised $3 billion will put little in the pocket of the everyday Australian.
“The problem with the $3 billion a year is it’s only enough to provide maybe an extra $6 a week to the average worker and $6 a week doesn’t buy much these days. It buys a 7/11 sandwich.
“$3 billion dollars sounds like a lot of money, but relative to the size of the economy, it’s only about 0.1 per cent. So, for household income, it’s about a 0.2 per cent boost on average.
“That’s not going to have much of impact in terms of making people feel happier or spending a lot more. So, I think they’ll probably, fingers crossed, announce more by the time of the April budget next year. That’s what I would expect to happen.
Stephen Anthony, chief economist at Industry Super Australia, agrees that the bounds of the MYEFO suggest the government is cautious of the current economic conditions maintaining into the future.
“If you take the parameters in their entirety, what the government is saying is that the global economy, and because of that the local economy, will grow more slowly than was previously anticipated,” he said.
“Over the outlook period, the outlook has essentially been written down by one quarter to one-half a percentage point, in terms of nominal GDP growth. So, it’s a marginal downward adjustment overall.
“Overall, the document is more cautious in tone than we saw at budget.
Mr Anthony said the indication comes in the government’s significant reduction in payments to transfer programs, such as welfare and social security.
“The other thing that is of note in this document is the government has written down what it will be paying in transfer programs over the outlook by about $18 billion,” he said.
“It seems to me that that is a fairly significant downward revision and, to the extent, that essentially represents the improvement in the budget bottom line, you question the structural integrity of this budget.
“On the one hand, you’ve got receipts at a cyclical high point, and on the other hand you’ve got payments at a cyclical low point.
“It makes you wonder where we will be when growth slows somewhat… If it actually gets a significant slowdown, the budget would be really a sea of red.”
He, too, pinpointed the risk basing budget bottom line improvement on high commodities and job growth poses long-term, and said it would be wise for the government to factor in the potential of economic downturn into the forward estimates.
“About half the improvement in the budget bottom line are those revenue heads that are impacted by ‘irregular profits’, let’s say,” he said.
“Right now, our commodity prices are about 45 per cent higher than the long-term average of the 1950s through to 2003. Therefore, you have to question whether, even if these high prices are achieved for a few years to come, you’d base a fiscal strategy on those high prices or if you would build into the forward estimates some sort of downwards reduction to levels closer to those long-term levels.
“As we view this document, it’s hard to see where that sort of caution is built into the forward estimates.
He said, overall, forecast drops in the commodities market and jobs growth, along with dwindling housing markets and global economic downturn, will likely stall the possibility of real surplus being achieved.
“This talk of a permanent return to surplus and a permanently stronger budget position is challengeable in terms of the budget parameters,” he said.
“It would be expected that the government will forecast a surplus in the 2019-20 budget. However, I think it’s unlikely that that surplus will be achieved. It’s one thing to forecast a budget surplus, it’s completely another thing to deliver one.
“I think that the combination of the [drop in the] property markets in Sydney and Melbourne, as well as the slowdown in the China economy and the plateauing in heavy engineering construction in Australia, will probably mean that the domestic economy will be somewhat slower in 2019-20 than people expect it to be and, therefore, it is less likely that the budget actually gets back into surplus.”