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ECONOMIC AND FISCAL OUTLOOK - 2017 FEDERAL BUDGET

Wednesday, 10 May 2017

As foreshadowed by Treasurer Scott Morrison the week before the Budget this year’s Budget highlights the net operating balance alongside the underlying cash balance to reflect those Government payments which contribute to recurrent expenditure.

The operating balance excludes interest payments on borrowings for capital spending.

The underlying cash deficit is expected to be $29.4 billion in 2017-18 and improve over the forward estimates to a projected surplus of $7.4 billion in 2020-21. The average annual pace of fiscal consolidation of 0.6 per cent of GDP is a slight improvement over the 2016-17 MYEFO.

The net operating balance is also expected to improve from $19.8 billion (1.1 per cent of GDP) in 2017-18 to reach a projected surplus of $7.6 billion (0.4 per cent of GDP) in 2019-20 and $17.5 billion (0.8 per cent of GDP) in 2020-21.

 

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Economic growth is expected to have slowed temporarily to 1¾ per cent in 2016-17 as a result of weather-related factors in early 2016-17 and the impact of Tropical Cyclone Debbie. The economy is expected to rebound to grow at 2¾ per cent in 2017-18 and 3 per cent in 2018-19, supported by growth in household consumption, exports and non-mining business investment as the drag from falling mining investment wanes.

The Budget says that overall, spending as a proportion of GDP are forecast to fall to 25 per cent by the end of the forward estimates, slightly lower than forecast at the 2016-17 MYEFO, before rising over the medium term.

Tax and other receipts as a proportion of GDP are expected to increase across the forward estimates, broadly in line with forecasts at the 2016-17 MYEFO.

Net debt is estimated to be 19.5 per cent of GDP in 2017-18 and to peak as a share of GDP at 19.8 per cent in 2018-19. Net debt is then projected to decline as a share of GDP to 8.5 per cent by 2027-28.

The Budget says “Australia’s transition towards broader-based growth is well advanced. The 2017-18 Budget aims to facilitate a smooth transition and ensure that all Australians have the opportunity to benefit from Australia’s continued economic growth by guaranteeing essential government services, easing pressure on the cost of living and building on the Government’s plan for economic growth and jobs.”

It says, “There have been encouraging signs that the global economy will strengthen over the coming years. Economic activity appears to have firmed in a range of countries and there are tentative signs that global trade growth is strengthening from subdued rates.

It says the Government is focusing on growing the economy to secure more and better paying jobs, by:
Increasing its total funding and financing commitments to transport infrastructure projects to over $70 billion from 2013-14 to 2020-21, including an equity investment of up to $5.3 billion in a new Commonwealth-owned company, WSA Co, to develop Western Sydney Airport and an additional $8.4 billion equity investment in the Australian Rail Track Corporation to deliver Melbourne to Brisbane Inland Rail;

Committing more than $533 million in new funding to infrastructure and community projects to improve the resilience, connectedness and adaptability of regions, including a $472 million Regional Growth Fund;

Putting Australian jobs first by better targeting skilled visas and introducing a Skilling Australians Fund to ensure that employers of foreign workers are investing in training Australians to meet future skills needs, with a particular focus on apprenticeships and traineeships; and

Continuing to support small businesses by extending the $20,000 immediate deductibility threshold for a further 12 months to 30 June 2018 at the higher $10 million annual turnover threshold.

The Budget:
• Establishes a Medicare Guarantee Fund
• Fully funds the Commonwealth’s contribution to the National Disability Insurance Scheme, through half a percentage point increase in the Medicare levy;
• New and amended listings on the Pharmaceutical Benefits Scheme.
• It says that although the payments-to-GDP ratio remains a little above its historical average of 24.8 per cent, the ratio is expected to fall to 25.0 per cent by the end of the forward estimates.

 

Economic Outlook

Domestically, it is anticipated that growth will lift following the effects of a number of weather-related events in 2016-17. Real GDP growth is expected to be 2¾ per cent in 2017-18 and 3 per cent in 2018-19. Australia’s economic performance continues to compare favourably with most advanced economies, including other major commodity exporters.

The lift in economic growth is expected to occur as the drag from falling mining investment diminishes and as growth in household consumption and non-mining business investment improves. Exports are also forecast to continue to grow, supporting greater economic activity and growth.

Nominal GDP growth is expected to increase strongly in 2016-17, driven by the large increase in coal and iron prices in the past year. Nominal GDP growth is forecast to slow to 4 per cent in 2017-18 and 2018-19 as commodity prices are expected to decline from their recent elevated levels. Growth in wages is expected to be subdued, butt a little stronger than recent rates, over the forecast period. Inflation is forecast to increase moderately in that time. These factors are expected to constrain the pace of nominal GDP growth in 2017-18 and 2018-19.

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Non-mining business investment is expected to benefit as negative spill-overs from the mining sector wane. It will also be supported by a strengthening in domestic demand, solid business conditions and low financing costs. Non-mining business investment is forecast to grow by 4½ per cent in both 2017-18 and 2018-19.

Household consumption growth is expected to pick up over the forecast horizon to 2¾ per cent in 2017-18 and 3 per cent in 2018-19. It is expected that consumption will continue to grow by more than household income, resulting in a further decline in the household saving rate.
Dwelling investment is forecast to slow to 1½ per cent in 2017-18 and to fall by 4 per cent in 2018-19.

The Budget says that globally,” there is heightened policy uncertainty as reforms needed to strengthen productivity have proved difficult to achieve and there appears to be growing support in some countries for protectionist policies. High levels of debt, potential financial imbalances and overcapacity in some sectors remain risks to the Chinese economy, while Europe continues to face legacy issues following the global financial crisis. The recalibration of interest rates in the United States is also a risk.
Domestically, there are risks around the momentum in household consumption as well as uncertainty around dwelling investment. The timing and pace of the recovery in non-mining business investment also remains a risk to the domestic outlook.

 

Click below to view source

Budget Paper No 1, Statement No 1.

Budget Paper No 1, Statement No 3.

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