The Federal Budget

Transcription

1 The 22-3 Federal Budget Presentation to a BRW / Ernst & Young breakfast Saul Eslake Chief Economist ANZ Bank Sofitel Hotel Melbourne 16 May 22 eslakes@anz.com or economics@anz.com Internet: and click on Economics Economics@

2 The only real surprise in the Budget was revelation of a cash deficit for $ bn May 1998 Successive estimates of the underlying cash balance for 21-2 Nov 1998 May 1999 Nov 1999 May 2 Nov 2 May 21 Oct 21 Economics@ May 22 The underlying cash surplus is the cash surplus net of sales of financial assets and net advances to State and Territory governments. Source: Budget Papers and MYEFOs.

3 The 21-2 owes more to pre-election largesse than to the war on terrorism Years ended 3 June ($bn) Economics@ 4-year total ($ bn) Fiscal balance as at May * 4.6 Parameter variations up to 21 election * Policy decisions up to 21 election Fiscal balance as at Oct Subsequent parameter variations -.7 Subsequent policy decisions +.7 Fiscal balance as at May * Partly estimated by Economics@ANZ. Sources: Budget Papers, MYEFOs, ANZ calculations.

4 The Government s attitude to budget surpluses has clearly changed somewhat In November 1999, when it appeared that Australia s military commitments in East Timor might result in a cash deficit, the Government proposed a temporary 1% surcharge on the top marginal income tax rate the East Timor commitment was expected to cost $1,89 mn and the Timor tax to raise $9mn susbequent improvements in the Budget position (and reductions in the cost of the East Timor deployment) meant the Timor tax was never implemented Australia s participation in the War on Terrorism is estimated to cost $2.1bn over 21-2 and 22-3 yet the Government has actually reduced taxes during this period (petrol excise, income taxes for self-funded retirees) and allowed the Budget to incur a cash deficit

5 The Budget projects a return to (larger) cash surpluses in 22-3 and beyond Underlying cash surplus 8 $ billion 21-2 Mid-Year Review estimates Budget estimates nf nf = not forecast. Source: 22-3 Budget Paper No 1.

6 The accrual-based bottom line is also projected to return to surplus Fiscal balance (accruals measure) $ billion 21-2 Mid-Year Review estimates 22-3 Budget estimates 2 nf nf = not forecast. Source: 22-3 Budget Paper No 1.

7 Bigger surpluses from next year on are the result of upgraded growth forecasts Years ended 3 June ($bn) year total ($ bn) Fiscal balance as at Oct nf Impact of parameter variations nf Impact of policy decisions Fiscal balance as at May Sources: 21-2 MYEFO; 22-3 Budget Paper No 1; ANZ calculations.

8 How the Treasurer got from a $1¼ bn deficit (accrual) to a $¼ $ bn surplus for $bn Fiscal balance as at Oct. 1 (-$1.3bn) Parameter variations (+$2.2bn) Defence, security & border protection measures (-$.8bn) Election promises (-$.3bn) PBS, DSP and other changes (-$.3bn) Fiscal balance as at May 2 (+$.2bn) Sources: 21-2 MYEFO; 22-3 Budget Paper No 1; ANZ calculations. Economics@

9 Key budget decisions Impact on budget surplus ($mn) 22-3 Over 4 years Defence & security ,372 Border protection measures Baby bonus tax refund -85-1,235 Aged care and carers promises Superannuation measures Other election promises PBS Scheme savings ,872 Disability pension targeting DSP & other welfare savings All other Net effect of policy decisions ,537

10 Fiscal policy thus again has an expansionary tilt - albeit much less than last year Impact of policy decisions on the Budget bottom line over rolling three-year periods $ bn Tax reform Policy decisions up to and including budget for year stated Sources: Budget documents; ANZ calculations. Calculations based on accruals estimates since

11 Not a lot in the Budget for business Gains Losses Assistance for specific companies (Methanex, Rio and Mitsubishi) $44mn over four years for Invest Australia attraction programs $6mn over four years for small business programs About $4mn extra over four years for tourism Tax loss benefits when offset against franked dividends no longer wasted Deferral of measures proposed under next phase of business tax reform resulting in extra tax collections of $3mn in 23-4 and $23mn in 24-5 Increased ASIC fees (raising an additional $23mn pa by 24-5) Termination of assistance schemes for the printing industry (saving $25mn) and TCF assistance schemes (saving $25mn over five years) Nothing in relation to insurance costs

12 A few seemingly odd things in the Budget The Tax Office gets additional funding of $36mn in 22-3, and $1.6bn over four years to improve service levels and maintain the integrity of the tax system but these will result in additional tax collections of only $33mn in 22-3 and $1.5bn over four years perhaps this is where future upward revisions to the surpluses for 23-4 and beyond will come from The 22-3 bottom line has been boosted by a number of deferrals $3mn from business tax reform, $15mn from defence hardware, and $2mn from roads programs The underlying cash result for 22-3 is boosted by sales of non-financial assets of $1.35bn ($5mn more than in 21-2 or 23-4) The cash surplus is also boosted by $2mn pa by treating the indexation component of HECS debts as interest receipts rather than principal repayments Economics@

13 Growth forecasts have been revised up, but appear quite readily achievable Real GDP growth Forecast for 21-2 revised up from 3% to 3¾% requires.9% growth in March and June quarters 22-3 growth revised from 3½% to 3¾% requires growth through 2 the year of 4% This is a good performance 1 given the international economic environment % change Upward revisions

14 The sources of economic growth will shift during the year Housing Consumer spending Exports % change % change % change Business investment Public spending Imports 15 % change 8 % change 15 % change Note: Charts show real p.c. changes for financial years ended 3 June.

15 Unemployment could fall below 6% next year Employment growth Unemployment rate % change Upward revisions % (June qtr)

16 Inflation forecasts revised up slightly Forecast for 21-2 unchanged at 2¾% Inflation assumed to average 2¾% in 22-3 (up from 2½%) implying 2½% by June quarter 23 not clear whether this forecast includes CPI effect of PBS changes Wages growth forecast at 4¼% ½ pc point of which reflects the final increase (to 9%) in SGC payments % change Headline inflation Economics@

17 Current account deficit will widen again next year $ bn Current account balance Current account deficit to widen to 4% of GDP in 2-3 Exports to rebound by 6% in 22-3 after a 2% decline in 21-2 reflects pick up in trading partners growth to 2¼% in 22 and 3¾% in 23 (from 1.4% in 21) However imports forecast to rise by 11% reflecting high import content of business investment

18 The Intergenerational Report: key points Main purpose is to raise public awareness of the budget impact of population ageing and stimulate debate on alternative strategies for dealing with it Says much the same thing as recent OECD Surveys of Australia Population ageing will begin to have a significant adverse impact on the budget from about 217 onwards On unchanged policies, Federal health spending will double as a share of GDP (from 4% to 8.1% of GDP) over the next 4 years - with the PBS accounting for over two-thirds of that increase Spending on age and service pensions is projected to rise from 2.9% to 4.6% of GDP over this period, partly offset by falls in spending on payments to working age people and families Spending on aged care is forecast to double from.7% to 1.8% of GDP between now and 242 On the assumption that Federal tax revenues remain at 22.4% of GDP, this leaves a gap of 5.% of GDP - equivalent to $87bn in today s dollars - needing to be financed somehow Economics@

19 Some observations on the IGR A number of recent Government policy decisions have exacerbated the impact of demographic change on the budget: indexing pensions in line with male average weekly earnings rather than CPI raising the tax-free threshold for persons over 65 to $2, (for individuals) compared with $6, for those under 65 easing eligibility criteria for concessions and benefits backdown over nursing home bonds Other government decisions - notably the abolition of petrol excise indexation (costing over $1.1bn pa by 24-5, and rising) - have also undermined the revenue base The Report rather conservatively assumes that productivity growth will revert to its long-term average of 1¾% pa (from the 199s average of 2% pa) - and hence that economic growth slows from an assumed 3.1% pa in the current decade to 2% pa from the 22s onwards thus ignoring the possibility that faster economic growth could make the problem more manageable Economics@

20 Summary The Budget does what the Government said it would do - nothing more, and nothing less The only genuine surprise was the deficit for 21-2 this was more the result of the Government s pre-election binge than of post-september 11 decisions, but markets will probably see it as old news The budget position improves in 22-3 and beyond mainly due to stronger economic growth the surpluses are relatively small (¾% of GDP by 25-6) for an economy that has had just one quarter of negative growth since 1991 The economic assumptions underpinning the budget are realistic and credible it s not impossible that the surpluses could, on unchanged policies, be larger than forecast, although markets would be justified in doubting that polices would remain unchanged The budget will have no material impact on interest rates Economics@