Australian Federal Budget 2017 - Overview
2017/18 budget deficit in line with MYEFO
The Government forecasts the budget position to improve from a deficit of 2.1% of GDP in the 2016/17 financial year to a small surplus of 0.4% of GDP in 2020/21. Revenues are projected to lift by 2.2% of GDP over the four years, to 25.4% of GDP, and expenses are expected to inch lower by 0.1% of GDP over this period, to 25.0% of GDP. The budget consolidates by 0.5% of GDP in each of the four years, with the exception of 2019/20, when the budget improves by 1.0%. The accelerated consolidation in 2019/20 occurs as revenue initiatives make a more material contribution. The timing of a return to budget surplus in 2020/21 is unchanged from the previous forecast profile.
Return to surplus still expected in 2020/21 ...
The economic outlook underpinning this fiscal profile is a relatively positive one. Real GDP growth is at trend or above across the forecast horizon and the terms of trade is not expected to have a substantially impact upon nominal GDP growth during this period.
In the 2016/17 financial year, the budget deficit is estimated to be $37.6bn (2.1% of GDP). That is a $1.1bn deterioration on the December mid-year budget update (MYEFO). Policy decisions increase spending by $1.5bn, only partially offset by a $0.3bn improvement due to parameter variations.
... driven by rising revenue and steady spending share.
For the coming financial year, 2017/18, the budget deficit is forecast to be $29.4bn (1.6% of GDP), representing a slight $0.7bn deterioration on MYEFO. Again, policy decisions are key to the deterioration, with a net impact of $2.3bn. A net increase in spending of $4.2bn (relative to the MYEFO profile) outweighs a net $1.9bn increase in revenue. Parameter variations support the budget to the tune of $1.6bn, cushioning the impact of policy decisions. A marginally more favourable near-term economic outlook is a plus for the budget, with nominal GDP growth upgraded to 4.0% from 3.75% in MYEFO.
New policy focuses on increased revenue
Across the following three years, the budget position improves from a deficit of $21.4bn in 2018/19 (1.1% of GDP) to a deficit of only $2.5bn (0.1% of GDP) in 2019/20 and then edges into surplus in 2020/21, $7.4bn (0.4% of GDP). In the final two years of the forward estimates, the budget position has improved relative to MYEFO by $7.5bn and $6.3bn, respectively. Central to the upgrade is a boost from new revenue initiatives, contributing a net $7.0bn and $8.5bn for these two years. Key measures include a medicare levy and a tax on banks (see over page).
Net debt peaks at 19.8% of GDP in 2018/19
Across the four years to 2020/21, the budget position has improved by $11.4bn, reflecting the combined impact of net new savings of $6.3bn (comprising $20.8bn in higher revenue against $14.5bn in additional spending) and parameter variations of $5.2bn. Revenue is $13.5bn higher across the period, while expenditures are $2.1bn higher. See below for a discussion of key new policies.
The Commonwealth Government's net debt position remains manageable. Net debt lifts from an estimated 18.6% of GDP ($325bn) in 2016/17 to a peak of 19.8% of GDP ($375bn) in 2018/19. By 2020/21, net debt is forecast to be $366bn, 17.6% of GDP. Net interest payments are steady at 0.7% of GDP across the forecast period, at $13.4bn in 2017/18.
Risks to budget forecasts skewed to the downside.
Gross debt is $501bn (28.6% of GDP), in 2016/17, rising to $606bn (29.2% of GDP) in 2020/21, with interest paid at 0.9% of GDP each year.
Risks to the fiscal projections are twofold. First, that the economic outlook is too optimistic, as discussed overleaf. Second, that revenues fail to increase as a share of the economy at the rate expected. Post the GFC the revenue share has remained stuck around 23.5% and the last time revenue hit 25% was in 2009/10.
Written by Westpac Economics
Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.
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