Initial assessment of the Federal Budget

Transcription

1 Initial assessment of the Federal Budget ANZ Budget Night dinner Saul Eslake with the assistance of Riki Polygenis & Amber Rabinov 8 th th May 27 1

2 The economic and political context 2

3 World economy enjoying its longest period of above-trend growth in over 3 years 8 Real % change from year earlier Global economic growth 7 6 Longterm trend World Advanced economies Developing economies

4 Australia is now getting a huge boost from rising export and falling import prices Average Australian export and import prices in inflation-adjusted US$ terms = 1 2 Import prices Export prices Sources: ABS; Economics@ANZ calculations.

5 Terms of trade gains have been worth $3,316 pa to each Australian since 1999 Real GDP and real gross domestic income Real GDP and income per capita 7 6 % ch from year earlier (trend) Real gross domestic income (GDI) A$ (at annual rates; trend; 24-5 prices) Real gross domestic product (GDP) GDP per capita -$1,767 +$1,55 GDI per capita * Real GDI = GDP adjusted for changes in the terms of trade. Sources: ABS; Economics@ANZ.

6 Treasury has usually over-estimated estimated real GDP and especially export volume growth Real GDP Export volumes 5 % change 8 % change Budget forecast Outcome

7 But it has consistently under-estimated estimated nominal GDP (which drives tax revenues) Successive estimates of nominal GDP $bn Budget 22-3 Budget 23-4 Budget 24-5 Budget 25-6 Budget 26-7 Budget Actual 7

8 Every year, tax revenue projections are revised up despite successive tax cuts $bn Successive Budget estimates of total tax revenues $14bn $7bn $18bn $25bn $19bn 2 19 $14bn Financial years 22-3 Budget 23-4 Budget 24-5 Budget 25-6 Budget 26-7 Budget 27-8 Budget

9 Most of these windfall revenue gains have come from company tax Successive Budget estimates of company tax revenues $bn $8bn $15bn $17bn Financial years $15bn $8bn 22-3 Budget 23-4 Budget 24-5 Budget 25-6 Budget 26-7 Budget 27-8 Budget $9bn

10 and have been used to cut personal income taxes Successive estimates of personal income tax revenues* 14 $bn -$3bn 135 -$7bn $2bn $¼bn +$1bn -$1bn Financial years 22-3 Budget 23-4 Budget 24-5 Budget 25-6 Budget 26-7 Budget 27-8 Budget

11 Windfall gains over the past five Budgets are nearly $4bn Net bottom line impact of parameter variations vs policy decisions (tax cuts or spending increases) 8 $bn Cumulative impact of: Financial years 'Parameter variations' 'Policy decisions'

12 Just because the Budget is in surplus doesn t t mean it s s not boosting demand A stylized representation of how the Budget boosts demand even with an unchanged surplus Mining companies Extra Tax Government Tax cuts etc. Households Dividends or retained earnings Supplyenhancing investment Other spending Budget surplus Demandenhancing spending 12

13 This 16-year period of continuous growth is the longest in Australia s s history Real GDP growth 1 % change from year earlier 8 6 Actual 4 2 Trend Note: shaded intervals denote periods in which real GDP growth was negative for two or more quarters, or during which real GDP declined from the year-earlier quarter.

14 16 years out from the last recession the economy is hitting capacity constraints Unemployment rates % of labour force Labour shortages % of businesses nominating labour as a constraint % Capacity utilization % Office vacancy rates Sydney Other cities

15 Australia s productivity miracle appears to have evaporated Labour productivity growth Labour productivity level 4 3 Average annual rate of change over rolling 4-year periods (%) United States % Australia 82 8 Australia GDP per hour worked as a percentage of US

16 Treasury Secretary Ken Henry on policy in a full employment economy In an economy operating at, or close to, full employment expansionary fiscal policy tends to crowd out private activity: it puts upward pressure on prices which puts upward pressure on interest rates. there is no policy intervention available to government, in these circumstances, that can generate higher national income without first expanding the nation s supply capacity. in a full employment economy it will almost always be the case that government activity that doesn t expand the economy s aggregate supply potential will reallocate resources from higher to lower productive areas, and in doing so reduce aggregate output by definition. 16 (Address to Treasury staff, 14 March 27)

17 An election is due later this year: and the Government is trailing in the polls Two-party preferred vote (as surveyed by Newspoll) Preferred Prime Minister (as surveyed by Newspoll) % Election Labor 7 6 % Election Howard Beazley/Rudd Dec 3 Aug 4 Feb 5 Aug 5 Coalition Mar 6 Oct 6 May 7 1 Dec 3 Aug 4 Feb 5 Sep 5 Apr 6 Uncommitted Nov 6 May 7 17 Note: Weekly data are smoothed using a 13-term Henderson moving weighted average as used by the ABS to derive trend data.

18 Lower-than-expected expected inflation has loosened the constraints on the Budget Consumer prices % ch. from year earlier RBA target range 'Headline' 'Underlying' Lower-than-expected CPI outcomes for the December and March quarters and the downward revision to the RBA s inflation forecast for the year to the Dec qtr 27 to 2½% from 2¾% have lowered the risk that the RBA will raise rates before the election 18

19 The Budget s s key decisions and how they have been funded 19

20 What do the words in the Budget speech and statements indicate about priorities? Word or phrase No of times used in - Budget Speech Budget statements Strong Working families National saving 4 Productivity 1 69 Participation 96 Capacity constraints 4 Education Climate change 5 9 Election 2 2

21 The hand-outs in this Budget ($7bn over five years) are the biggest ever Impact of policy decisions over Forward Estimates periods of the last eight Budgets $ billion Budget Note: Figures in this chart based on accrual rather than cash estimates, and represent the total (over the remainder of the preceding year plus the 4 year Forward Estimates period) impact of decisions taken since the previous Budget.

22 Budget handouts funded by $72bn of parameter variations (windfall gains) Reconciliation of successive estimates of the underlying cash balance ($ bn) Total As at May Parameter variations Policy decisions As at December * 54.3 Parameter variations Policy decisions As at May Note: Parameter variations are changes in spending or revenue projections arising from changes in economic assumptions, changes in the revenue yield from particular taxes, slippage in implementation of policy decisions, etc. * Economics@ANZ estimate 22

23 In this Budget superannuation tax collections have been revised up sharply Successive estimates of super fund tax revenues 11 1 $bn $3¼ bn $2¾ bn 9 8 $1¾ bn $1¼ bn 7 6 $¾ bn $-½ bn Financial years 22-3 Budget 23-4 Budget 24-5 Budget 25-6 Budget 26-7 Budget 27-8 Budget

24 Major policy decisions: revenues Personal income tax (incl. dependent spouse rebate increase) Double cocontribution for lower income earners Fraud & compliance Company loss recoupment rules Net reduction in revenues ($mn) Total Other Total Note: figures in this table are in accrual, not cash, terms

25 Major revenue decisions Income tax 25 Personal tax relief worth $31.5bn over four years Threshold for 3% marginal rate lifted to $3, from 1 July 27 Threshold for 4% marginal rate lifted to $8, from 1 July 28 Threshold for 45% marginal rate raised to $18, from 1 July 28 Low Income Tax Offset (LITO) increased to $75 (from $6) per year and phase out from $3, (up from $25,) from 1 July 27 Seniors income tax offset Eligible senior Australians to pay no tax on annual income up to $25,867 for singles and $43,36 for couples Small business Businesses with turnover <$75, will not need to register for the GST

26 Big changes in tax thresholds, no changes in rates nor to tax base Current tax thresholds Tax rate Threshold from Tax rate Threshold from Tax rate Income range 1 July 27 1 July 28-6, -6, -6, 6,1 21,6 21,61 63, 63,1 95, 15 6,1 3, 3 3,1 75, 4 75,1 15, 15 6,1 15 3, 3 3,1-3 8, 4 8,1 4 18, 95, , ,

27 It s s an election-year budget, so someone always gets a cash hand-out Budget Recipients Amount Total cost 21 Pensioners $3 $1 mn 24 Carers $6/ $1 $255 mn 27 Senior s bonus Carers bonus Super cocontribution (in respect to eligible 25-6 contributions) Ex-prisoners of war in Europe (or widows) $5 $6/ 1 $25, $1.3bn $394mn $1.1bn $57mn over two years 27 Child care tax rebate claimants (per child) Up to $4,2

28 Major policy decisions: spending Education & skills - Transport & infrastructure Net increase in spending ($mn) Total - Industry assistance Environment National security & defence 34 Health & aged care Families & older Australians Rural Australia Other Total Note: figures in this table are in accrual, not cash, terms

29 The Budget s s bottom lines 29

30 Projected cash surplus 1.2% of GDP in 26-7, 7, then 1% of GDP afterwards 16 $ bn Underlying cash surplus * Mid-Year Review 27-8 Budget 3 The underlying cash surplus is the cash surplus net of sales of financial assets and net advances to State and Territory governments. * ANZ estimate of surplus projection as at 26-7 Mid-Year Review.

31 The government usually under-estimates estimates the eventual cash balance Underlying cash balance forecast and actual $ billion (e) (f) Budget projection Final outcome 31 Budget projection is the forecast made in the Budget prior to the commencement of the year concerned. Final outcome is as reported as at May 27. Sources: Budget Papers from through 26-7.

32 How would ASIC regard a company which gave such inaccurate earnings guidance? Estimates of the underlying cash balance ($million) Initial estimate (prvs May) Second estimate (December) Third estimate (May) Final outcome (June) ,65-8,49-6,856-5, ,853-2,746-1,155 1, ,688 3,267 2,883 4, ,28 3,431 7,795 13, ,844 4,329 2, , ,193 5,971-1, ,94 2,141 3,918 7, ,665 4,635 4, ,391 6,26 9,228 8,36 13, ,921 11,452 14,85 15, ,828 11,827 13, Average error 4,325 3,84 2,686

33 Higher headline balance reflects Telstra sale in Underlying and headline cash surpluses $ billion Boosted by 'T3' Includes Medibank Private & ASC 'Underlying' 'Headline' 33

34 The Future Fund The Future Fund will have $52bn of assets by June 27. The Government also expects to make a further contribution to the Fund from the second instalment of Telstra sale proceeds But the Government has not committed to adding the 26-7 surplus or any future surpluses to the Fund. We estimate that the Fund could reach its target of $14bn by 22 without any more surpluses (assuming 8% nominal growth) The Future Fund Board of Governors has been given a new task: managing and investing the Higher Education Endowment Fund which has been established with an initial investment of $5bn from the 26-7 surplus. 34

35 Projected budget surpluses are smaller than at previous commodity cycle peaks Commonwealth underlying cash balance 2 $bn % As a % of GDP (right scale) $ bn (left scale) Sources: 26-7 Budget Paper No. 1, Statement 13, Table 1 (and previous issues).

36 Australia s s budget surplus ranks only 11 th among advanced economies in 27 General government financial balance as % of GDP, 27 % (18) Israel Japan Portugal France USA UK Italy Greece Cyprus Germany Austria Slovenia Taiwan Iceland Switzerland Belgium Netherlands Canada Australia Spain Ireland Hong Kong Korea Sweden Denmark Finland NZ Singapore Norway 36

37 Treasury s s economic outlook for and beyond 37

38 Key assumptions and influences on the forecast 38 Assumptions World economy continues to grow above trend (5% pa) Oil prices average remain unchanged at current levels Return to normal seasonal conditions in rural areas A$ averages around TWI 67 (~US82 ) Interest rates remain unchanged at current levels Growth drivers Significant rebound in farm product assuming drought ends Upward trend in export volume growth, modest fall in export prices Continued growth in business investment to lift production capacity Household spending growing at 3½% pa Modest (2½%) growth in dwelling construction

39 Treasury expects continued strong growth in the world economy Real GDP growth (%) United States ¼ 3 Euro area ½ 2¼ Japan China ½ 1¼ Other East Asia World Source: 26-7 Budget Paper No. 1, Statement 3, Table 2.

40 Treasury expects growth rebound in then slowdown in Forecast for 26-7 remains at 2.5% requires.6% growth in March and June quarters 27-8 forecast unchanged at 3¾% assumes rebound in farm output non-farm real GDP growth forecast to increase from 3% to 3½% GDP growth projected to slow to 3% from 28-9 onwards % change Real GDP growth

41 Nominal growth (which drives revenue) expected to slow after Commodity prices have been stronger than expected this year boosting nominal GDP growth to 6¾ % But non-rural commodity prices are expected to decline over next two years cutting nominal GDP growth to 6¼ % in 27-8 and (with slowing real growth) to below 5% thereafter Nominal GDP growth % change Upward revisions 7-8 Downward revision

42 Exports and public spending to lead economic growth as investment plateaus Consumer spending Business investment Exports % change % change % change Housing Public spending Imports % change % change % change Note: Charts show real p.c. changes for financial years ended 3 June.

43 Unemployment forecast to head back up to 5% Employment growth Unemployment rate % change Upward revisions Babyboomers start to retire % (June qtr)

44 Treasury is more sanguine about inflation than the Reserve Bank Headline inflation Headline inflation expected to fall from 2¾% in 26-7 to 2½% in 27-8 Treasury expects core inflation to remain at 2½% in 27-8 (cf. RBA concerned at rise to top end of target band) Wages growth to remain unchanged at 4% to 4¼% % change Downward revision

45 Current account deficit will widen next year despite rise in export volumes Current account balance $ bn Revision Deficit to widen from $58¼bn (5¾% of GDP) in 26-7 to $65¾bn (6%)in 27-8 Exports to grow 5% driven largely by resources exports as major investments come on stream rural exports also stronger in 27-8 Import growth slows to 6½% (from 8½% in 26-7) reflecting slowdown in business investment Terms of trade to deteriorate from 27-8 onwards Widening in current account deficit driven by higher net interest and profit payments abroad 45

46 46 Assessment and conclusion

47 As in recent years this Budget recycles cash from companies to households The 27-8 Budget is based on revenue windfalls totalling $68bn over four years (most of it from increased company tax collections), and gives away or spends all of it There are a number of measures in the Budget which do represent worthwhile investments in future growth 47 particularly in education, child care and infrastructure and addresses some serious problems for example indigenous housing and environment But more than half the budget give-aways are cash transfers to households tax cuts and increased cash benefits which will boost demand If voters appreciate the tax cuts, then this Budget deals the Government back into the electoral game.. but it also puts interest rates back on the agenda for 28