Overview

Budget Review 2018–19 Index

Economics Section

This brief provides an overview of the key fiscal and economic numbers from the 2018–19 Budget.

A substantial improvement in the forecast economic and fiscal position since the 2017–18 Mid-Year Economic and Fiscal Outlook (MYEFO) is due largely to upward revisions to tax receipts driven by employment and GDP growth.

The Government is now forecasting that the Budget will return to an underlying cash balance surplus of $2.2 billion (0.1 per cent of GDP) in 2019–20. This is one year earlier than was forecast in the 2017–18 MYEFO. The surplus is expected to grow to $16.6 billion (0.8 per cent of GDP) in 2020‑21 and build to at least 1 per cent of GDP over the medium term.

This improved fiscal position is primarily the result of improvements in underlying economic parameters (parameter variations)—most notably higher GDP and employment forecasts, which are expected to result in higher taxation receipts and lower payments over the forward estimates period.

Additional policy decisions taken by the Government in the 2018–19 Budget are expected to have a net negative impact on the Budget over the forward estimates period, offsetting some of the improvement in the underlying fiscal position as a result of parameter variations.

Figure 1: impact of underlying parameter and policy variations since the 2017–18 MYEFO

Impact of underlying parameter and policy variations since the 2017–18 MYEFO

Note: UCB = underlying cash balance

The Government’s medium-term fiscal strategy (tax receipts <23.9%)

The Government’s medium-term fiscal strategy is to achieve budget surpluses, on average, over the course of the economic cycle. The budget repair strategy is designed to deliver budget surpluses building to at least 1 per cent of GDP as soon as possible, consistent with the medium-term fiscal strategy.[1]

A new component of the Government’s medium-term strategy in the 2018–19 Budget is a commitment to ‘maintaining a sustainable tax burden consistent with the economic growth objective, including through maintaining the tax-to-GDP ratio at or below 23.9 per cent of GDP’.[2] Taxation receipts are expected to grow to 23.9 per cent of GDP by the end of the forward estimates.

A number of commentators have questioned the economic rationale for the adoption of this ratio; noting that, in combination with the budget repair strategy, it gives the Government limited fiscal policy flexibility. As a result of these self-imposed constraints on revenue, future budget surpluses are likely to be small unless there are significant cuts to expenditure.[3] 

Views on the economic estimates

As the improvement in the Australian government’s fiscal position is heavily reliant on improvement in the underlying economic parameters, this outcome is sensitive to considerable uncertainty.

A number of commentators have remarked upon the underlying economic assumptions used in the Budget. EY and the Grattan Institute argue that the forecasts are ‘optimistic’:

The economic growth forecasts underpinning the budget are on the optimistic side. The budget projects a return to 3% trend growth, supported by an ongoing recovery in business investment, stronger household spending and a continuing public infrastructure spend.[4]

[and]

The budget forecasts for wages growth, driving much of the planned increase in personal income tax collections, also remain optimistic. Like the Reserve Bank, Treasurer Scott Morrison is banking on strong growth in full-time employment translating into higher wages. Wages growth is expected to accelerate from just over 2 per cent a year today to 3.5 per cent by 2020–21.[5]

Deloitte highlight the uncertainties about the Budget’s underlying assumptions:

The new plan may work, but it is vulnerable to economic and budgetary conditions. If the economy takes a dive, then the Budget outlook would dive alongside it. And the extended period of a promised-but-never-materialised return to surplus may linger even longer.[6]

Global risks

The Government acknowledges that there are also global risks that may have a bearing on the Budget forecasts:

Globally, these risks are broadly balanced in the short term, although they are tilted to the downside in the longer term. Key risks include a faster-than-expected tightening of monetary policy, geopolitical tensions and policy uncertainty in relation to trade protectionism. More broadly, a very sharp adjustment in financial markets, which might occur from a range of factors including elevated debt levels in a number of economies, would pose a risk to both global and domestic activity.[7]

Headline Numbers

Economic numbers

There are a few considerable changes to the Government’s assumptions around major economic parameters since the 2017–18 MYEFO (see Table 1). These upwards revisions are predominately in the 2017–18 financial year, which means that they have cumulative effects across the forward estimates period. The changes are as follows:

  • Real GDP growth for 2017–18 has been revised up to 2.75 per cent from 2.5 per cent.
  • Nominal GDP growth in 2017–18 has been revised up to 4.25 per cent from 3.5 per cent (but revised down for 2018–19 by 0.25 per cent).
  • Employment growth in 2017–18 has been revised upwards by 1 per cent to 2.75 per cent.

Government forecasts of growth in the Wage Price Index are unchanged.

Table 1: growth in key economic parameters at 2018–19 Budget relative to 2017–18 MYEFO

  Outcomes Forecasts Projections
2016–17 2017–18 2018–19 2019–20 2020–21 2021–22
Real GDP 2.1 2.75 3 3 3 3
Change since MYEFO 0.1 0.25 0 0 0 n/a
Nominal GDP 5.9 4.25 3.75 4.75 4.5 4.5
Change since MYEFO 0.1 0.75 0.25 0.25 0.25 n/a
CPI 1.9 2 2.25 2.5 2.5 2.5
Change since MYEFO 0 0 0 0 0 n/a
Wage Price Index 1.9 2.25 2.75 3.25 3.5 3.5
Change since MYEFO 0 0 0 0 0 n/a
Employment 1.9 2.75 1.5 1.5 1.25 1.25
Change since MYEFO 0 1 0 0.25 0 n/a
Unemployment 5.6 5.5 5.25 5.25 5.25 5
Change since MYEFO 0 0 0 0 0 n/a

Sources: Australian Government, Mid-Year Economic and Fiscal Outlook 2017–18, p. 3; Australian Government, Budget strategy and outlook: budget paper no. 1: 2018–19, Statement 1, p. 1-10.

The Reserve Bank of Australia has forecast year-end real GDP growth of 2.75 per cent for 2017–18, but it expects stronger growth of 3.5 per cent in 2018–19 before falling to 3.0 per cent in 2019–20.[8]

Fiscal numbers

The underlying cash balance is forecast to fall to a deficit of $14.5 billion (0.8 per cent of GDP) in 2018–19, and to return to a surplus of $2.2 billion (0.1 per cent of GDP) in 2019–20 (see Table 2 and Figure 2).

Table 2: underlying cash balance

  Actual Estimates Projections  
  2017–18 2018–19 2019–20 2020–21 2021–22 Total
Underlying cash balance ($b) –18.2 –14.5 2.2 11.0 16.6 15.3
Per cent of GDP –1.0 –0.8 0.1 0.5 0.8  

Source: Australian Government, Budget strategy and outlook: budget paper no. 1: 2018–19, Statement 3, p. 3-5.

Figure 2: underlying cash balance

Underlying cash balance

Source: Australian Government, Budget strategy and outlook: budget paper no. 1: 2018–19, Statement 11, Historical Australian Government Data, Table 1, p. 11-6.

The structural budget balance—which removes those factors which have a temporary impact on revenues and expenditures—is estimated to improve from a deficit of 1.25 per cent of GDP in 2018–19 to a series of surpluses from 2020–21.

Total general government sector receipts are estimated to be $473.7 billion (24.9 per cent of GDP) in 2018–19, rising to $554.0 billion (25.5 per cent of GDP) in 2021–22 (see Table 3 and Figure 3).

Table 3: total general government sector receipts

  Actual Estimates Projections  
  2017–18 2018–19 2019–20 2020–21 2021–22 Total
Receipts ($ b) 445.1 473.7 503.7 525.5 554.0 2 056.8
Per cent of GDP 24.3 24.9 25.3 25.2 25.5  

Source: Australian Government, Budget strategy and outlook: budget paper no. 1: 2018–19, Statement 3, p. 3-10.

Figure 3: payments and receipts

Payments and receipts

Source: Australian Government, Budget strategy and outlook: budget paper no. 1: 2018–19, Statement 11: Historical Australian Government Data, Table 1, p. 11-6.

Tax receipts are estimated to be $440.5 billion (23.1 per cent of GDP) in 2018–19 and $465.5 billion (23.3 per cent of GDP) in 2019–20, increasing to a projected $519.6 billion (23.9 per cent of GDP) by 2021–22. This projection is consistent with the updated medium-term fiscal strategy, which includes the maintenance of a tax-to-GDP ratio at or below 23.9 per cent of GDP.

General government sector payments are estimated to fall as a share of GDP, from 25.4 per cent of GDP in 2018–19 to 24.7 per cent of GDP in 2021–22 (see Table 4 and Figure 3).

Table 4: general government sector payments

  Actual Estimates   Projections    
  2017–18 2018–19 2019–20 2020–21 2021–22 Total
Payments ($b) 459.9 484.6 497.5 514.5 537.3 2 034.0
Per cent of GDP 25.1 25.4 25.0 24.7 24.7  

Source: Australian Government, Budget strategy and outlook: budget paper no. 1: 2018–19, Statement 3, p. 3-10.

General government net capital investment is expected to be $4.9 billion in 2018–19 (0.3 per cent of GDP), $4.8 billion higher than net capital investment in 2017–18. This change is due to funding associated with the implementation of the 2016 Defence White Paper.[9] Over the four years to 2021–22, net capital investment in defence is projected to total $25.3 billion. Net capital investment in almost all other functions is projected to decline.[10]

General government sector net debt is estimated to reach 18.4 per cent of GDP in 2018–19, before falling 14.7 per cent of GDP in 2021–22. It is projected to continue falling to 5.2 per cent of GDP by 2027–28 (see Table 5 and Figure 4).[11]

Table 5: net and gross debt

  Actual Estimates Projections
  2017–18 2018–19 2019–20 2020–21 2021–22  
Net debt ($b) 341.0 349.9 344.0 334.3 319.3  
Per cent of GDP 18.6 18.4 17.3 16.1 14.7  
Gross debt ($b) 533.0 561.0 579.0 566.0 578.0  
Per cent of GDP 29.0 29.5 29.0 27.2 26.6  

Source: Australian Government, Budget strategy and outlook: budget paper no. 1: 2018–19, Statement 11, p. 11-12 and p. 11-14.

Figure 4: net debt

Net debt

Source: Australian Government, Budget strategy and outlook: budget paper no. 1: 2018–19, Statement 11: Historical Australian Government Data, Table 4, p. 11-12.

Gross debt (the face value of CGS on issue) is projected to rise from 29.4 per cent of GDP in 2018–19 to 26.6 per cent of GDP by the end of the forward estimates, before falling to $532 billion by 2028–29 (see Table 5).[12]

General government sector net interest payments are estimated to fall from $14.5 billion (0.8 per cent of GDP) in 2018–19 to $12.2 billion (0.6 per cent of GDP) in 2019–20, remaining at 0.6 per cent of GDP up to 2021–22 (see Table 6).[13]

Net financial worth, an indicator of fiscal sustainability, has improved over the forward estimates relative to 2017–18 MYEFO. It is estimated to be 25.4 per cent of GDP in 2018–19, improving marginally to 24.2 per cent of GDP in 2019–20. Another component of the medium term fiscal strategy is ‘improving net financial worth over time’. Government projections suggest that net financial worth will be 7.5 per cent of GDP by 2028–29.[14]

Table 6: net financial worth and net interest payments

  Actual Estimates Projections
  2017–18 2018–19 2019–20 2020–21 2021–22
Net interest payments ($ billion) 13.1 14.5 12.2 12.4 12.2
Per cent of GDP 0.7 0.8 0.6 0.6 0.6
Net financial worth ($ billion) 466.3 482.9 482.1 471.3 453.9
Per cent of GDP –25.4 –25.4 –24.2 –22.6 –20.9

Source: Australian Government, Budget strategy and outlook: budget paper no. 1: 2018–19, Statement 3, p. 3-16.

Key revenue and expense measures

Table 7 lists the major revenue measures—and Table 8, the major expense measures—with a significant impact in the 201819 Budget.

Table 7: major policies—revenue measures

  201718 ($m) 201819 ($m) 201920 ($m) 202021 ($m) 202122 ($m) Total ($m)
Personal Income Tax Plan 360 4 120 4 420 4 500 13 400
Personal Income Tax retaining the Medicare levy rate at 2 per cent 400 3 550 4 250 4 600 12 800
Black Economy Package Combatting Illicit Tobacco 15 3 251 148 193 3 577
Better targeting the Research and Development Tax Incentive 314 641 764 719 2 438
Black Economy Package New and enhanced ATO enforcement against the Black Economy 340 467 533 578 1 917
Personal Income Tax - ensuring individuals meet their tax obligations 180 258 277 277 991
Protecting Your Super Package changes to insurance in superannuation 224 228 245 697
A firm stance on tax and superannuation debts 149 152 156 160 617
Black Economy Package further expansion of taxable payments reporting 4 47 264 299 606
Superannuation better integrity over deductions for personal contributions 89 109 110 120 427

Source: Australian Government, Budget Measures: budget paper no. 2: 2018–19, Table 1, pp. 16.

Table 8: major policies—expense measures

  201718 ($m) 201819 ($m) 201920 ($m) 202021 ($m) 202122 ($m) Total ($m)
Supporting Our Hospitals – National Health Agreement – public hospital funding –50 –331 –597 –977
Pharmaceutical Benefits Scheme – new and amended listings –17 –175 –221 –255 –102 –770
Great Barrier Reef 2050 Partnership Program –444 –10 –5 –8 –11 –478
Remote Indigenous Housing in the Northern Territory –110 –110 –110 –110 –440
National Research Infrastructure Investment Plan – implementation of Government response –199 –6 –26 –76 –87 –393
Funding to Boost Services in the Northern Territory –260 –260
More Choices for a Longer Life – finances for a longer life 0 –21 –93 –75 –70 –259
Managing the Skilling Australians Fund – revised implementation arrangements –250 –250
National School Chaplaincy Programme – continuation –62 –62 –62 –62 –247
Building Better Regions Fund – round three –40 –108 –48 –10 –207

Source: Australian Government, Budget Measures: budget paper no. 2: 2018–19, Table 2, pp. 4768.

 

Revenue 2018–19
  $b Percentage
Personal income tax 222.9 45.9
Company & resource rent taxes 92.6 19.0
Sales tax (incl. GST) 72.1 14.8
Fuels excise 19.5 4.0
Other taxes 44.9 9.2
Non-tax revenue 34.1 7.0
Total 486.1 100.0
Figure 5: revenue in 2018–19

Revenue in 2018–19

Source: Australian Government, Budget strategy and outlook: budget paper no. 1: 2018–19, Budget overview, 8 May 2018, Statement 6, Appendix A, p. 6-50.

Government expenses by function 2018–19
Function $b Percentage
Social security and welfare 176.0 36.0
Health 78.8 16.1
Education 34.7 7.1
Defence 31.2 6.4
General public services 23.1 4.7
All other functions 46.8 9.6
Other purposes 98.0 20.0
Total 488.6 100.0
Figure 6: expenses by function

Expenses by function 

Source: Australian Government, Budget strategy and outlook: budget paper no. 1: 2018–19, Budget overview, 8 May 2018, Statement 5, Table 10, p. 5-21.

 


[1]           Australian Government, Budget strategy and outlook: budget paper no. 1: 2018–19, Statement 3, p. 3-7.

[2].          Ibid.

[3].          D Richardson and B Browne, The arbitrary 23.9 per cent tax revenue to GDP figure: from a convenient assumption to a ‘speed limit’, Australia Institute, Briefing note, April 2018; National Australia Bank (NAB), Federal Budget 2018–19, May 2018.

[4].          EY, Federal Budget 2018: Punting on growth, May 2018.

[5].          B Coates and D Wood (Grattan Institute), ‘Budget 2018: built on good fortune, relying on luck’, Inside Story, 9 May 2018.

[6].          Deloitte, The intersection of politics and prudence: Australian Federal Budget 2018–19, May 2018.

[7].          Australian Government, Budget strategy and outlook: budget paper no. 1: 2018–19, Statement 1, p. 1-9.

[8].          Reserve Bank of Australia, Statement on Monetary Policy, May 2018.

[9].          Australian Government, Budget strategy and outlook: budget paper no. 1: 2018–19, Statement 6, p. 6-46.

[10].       Ibid., Table 20, p. 6-48.

[11].       Ibid., Statement 11, p. 11-12.

[12].       Ibid., Statement 3, p. 3-16.

[13].       Ibid.

[14].       Ibid., p. 3-17.

 

All online articles accessed May 2018 

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