Budget overview

Budget Review 2019–20 Index

Phillip Hawkins and Liz Wakerly
Economic Policy Section

This brief provides an overview of the key fiscal and economic numbers from the 2019–20 Budget.

Macroeconomic parameters

Domestic economy

Relative to the Mid-Year Economic and Fiscal Outlook 2018–19 (MYEFO), Government forecasts for key domestic macroeconomic parameters have largely been revised downwards (see Table 1 below). The main changes include the following:

  • Real Gross Domestic Product (GDP) for 2018–19 has been revised down by 0.50 per cent to 2.25 per cent (and down by 0.75 per cent since the 2018–19 Budget) and down by 0.25 per cent for 2019–20 and 2020–21. PwC has noted:

    In an enterprise as big as the Australian economy, that missing ¼ per cent [real GDP] growth will be noticed.

  • Nominal GDP has been revised upwards slightly for 2018–19 to 5 per cent, largely reflecting improved commodity prices rather than output improvement. This translates to an additional $4.6 billion in nominal GDP in 2018–19.
  • Inflation, as measured by the Consumer Price Index (CPI), has been revised down by 0.50 per cent to 1.50 per cent for 2018–19 (and down by 0.75 per cent on the 2018–19 Budget) but is expected to recover to the long run level of 2.50 per cent by 2020–21.
  • Wage price growth has been revised downwards, again, for 2019–20 and 2020–21, but is expected to return to 3.5 per cent per annum by 2021–22 (note that these forecasts still exceed the RBA forecasts of 2.5 per cent for 2019–20 and 2.6 per cent for 2020–21.) This is despite forecasts for employment growth, the unemployment rate and participation remaining largely unchanged.
  • The terms of trade have been revised upwards for 2018–19 and 2019–20, reflecting stronger-than-expected commodity prices (an increase in the terms of trade of 9.25 per cent since the 2018–19 Budget forecast for 2018–19).[1]

Table 1: growth in key economic parameters at 2019–20 Budget relative to 2018–19 MYEFO

  Outcome Forecasts Projections
2017–18 2018–19 2019–20 2020–21 2021–22 2022–23
Real GDP 2.80 2.25 2.75 2.75 3.00 3.00
Change since MYEFO 0 –0.50 –0.25 –0.25 0 n/a
Nominal GDP 4.70 5.00 3.25 3.75 4.50 4.50
Change since MYEFO 0 0.25 –0.25 –0.50 0.25 n/a
Consumer Price Index 2.10 1.50 2.25 2.50 2.50 2.50
Change since MYEFO 0 –0.50 0 0 0 n/a
Wage Price Index 2.10 2.50 2.75 3.25 3.50 3.50
Change since MYEFO 0 0 –0.25 –0.25 0 n/a
Employment 2.70 2 1.75 1.75 1.50 1.50
Change since MYEFO 0 0.25 0 0.25 0 n/a
Unemployment rate 5.40 5.00 5.00 5.00 5 5.00
Change since MYEFO 0 0 0 0 0 n/a
Terms of trade 1.90 4.00 –5.25 –4.75    
Change since MYEFO 0 2.75 0.75 n/a    

Sources: Australian Government, Mid-year economic and fiscal outlook 2018–19, pp. 4, 19; Australian Government, Budget strategy and outlook: budget paper no. 1: 2019–20, Statement 1, p. 1-8 and Statement 2, p. 2-5.

According to the Australian Institute of Company Directors:

Given the soft start to the current year, the ongoing adjustment in housing markets, and the still sluggish pace of wage growth, risks to these forecasts for the Australian economy are skewed to the downside, with the budget papers highlighting the risks posed by a more subdued outlook for household income and high levels of household debt.

Budget sensitivity analysis around nominal GDP growth forecasts suggests that there is a 70 per cent chance that average annualised nominal GDP growth in the two years to 2019–20 will lie in the range of 3.0 to 5.5 per cent.[2]

Although household consumption growth is expected to rise over the forecast period ‘supported by continued growth in employment, a pick-up in wage growth, historically low interest rates and the Government’s personal income tax relief measures’, the Budget acknowledges that the outlook for the housing market poses a downside risk for consumption. Lower wage growth will negatively affect household consumption and nominal GDP outcomes, pushing growth to the lower end of the sensitivity range.

Scenario analysis explores the impact of a level of consumption growth 1.00 per cent lower in 2019–20 than in the current Budget forecast (which assumes growth of 2.75 per cent). After two years, real and nominal GDP are forecast to be 0.5 per cent lower, total receipts to be down $3.0 billion and the underlying cash balance (UCB) to deteriorate by $2.8 billion—equivalent to 39 per cent of the forecast 2019–20 UCB surplus. If inflation (as measured by the CPI) were 0.5 per cent lower in each of 2019–20 and 2020–21, this would result in a similar deterioration in the UCB through its impact on nominal GDP and tax receipts.

International

Relative to the 2018–19 MYEFO, Government forecasts for world GDP growth have been revised down by 0.05 per cent to 3.70 per cent for 2018 and by 0.25 per cent to 3.50 per cent for both 2019 and 2020. These numbers are now closer to IMF World Economic Outlook forecasts released in January 2019, which pointed to weakening global growth. Budget Paper No. 1 states:

Internationally, while some risks have lessened somewhat since the MYEFO, downside risks remain around trade tensions, emerging market debt vulnerabilities and geopolitical issues.

...

There is a high degree of uncertainty around the global growth outlook amid a range of economic and geopolitical risks that continue to evolve. This uncertainty appears to be weighing on measures of global confidence, which have been falling in recent months.

Growth of major trading partners has been revised down slightly for 2018–19, possibly reflecting slower than expected growth in the Euro area and India, but the Government considers:

The Australian economy is expected to continue to benefit from growth in major trading partners, with economies in the Asian region growing relatively strongly.

Fiscal numbers

The surplus or deficit is measured by the underlying cash balance, which is a measure of the difference between the receipts of the Australian Government (including tax and non-tax receipts) and the payments the Government makes on a cash accounting basis. The fiscal balance is broadly the equivalent measure on an accrual basis, measuring the difference between revenues and expenses (including net capital expenditures).

Figure 1 shows that the UCB is forecast to be in surplus in 2019–20, which if delivered, would be the first budget surplus since 2007–08. The surplus is forecast to be $7.1 billion (0.4 per cent of GDP) in 2019–20, growing to $17.8 billion (0.8 per cent of GDP) in 2021–22, before declining slightly to $9.2 billion (0.4 per cent of GDP) by 2022–23.

Figure 1: underlying cash balance

Underlying cash balance

Source: Australian Government, Australian Government, Budget strategy and outlook: budget paper no. 1: 2019–20, statement 10, p. 10-5 and 10-6.

Figure 2 shows that the forecast return to surplus is largely predicated on growth in total receipts back to around 25 per cent, their level prior to the global financial crisis of 2007–08 (but above their 30 year average of 24 per cent).

Receipts were anticipated to be around 24.2 per cent of GDP in 2017–18, but are expected to rise to 25.2 per cent in 2019–20 and to settle at or slightly above this level across the forward estimates. The majority of total receipts are made up of tax receipts which were 22.6 per cent of GDP in 2017–18, and are expected to grow to 23.7 per cent of GDP by 2021–22, before falling to 23.3 per cent of GDP in
2022–23.

Payments are expected to decline from 24.9 per cent of GDP in 2018–19 to 24.6 per cent in 2019–20, before settling around 24.5 per cent of GDP across the forward estimates.

Figure 2: receipts and payments

Receipts and payments

Source: Australian Government, Australian Government, Budget strategy and outlook: budget paper no. 1: 2019–20, statement 10, p. 10-5 and 10-6.

Figure 3 shows that net debt is forecast to peak at $361.0 billion (19.2 per cent of GDP) in 2018–19, before declining to $326.1 billion (14.4 per cent of GDP) in 2022–23.

Reflecting the forecast downwards trajectory in Commonwealth net debt, net interest payments are also expected to decline over the forward estimates period from $14.1 billion (0.7 per cent of GDP) to $8.7 billion (0.4 per cent of GDP) in 2022–23.

Figure 3: net debt and net interest payments

Net debt and net interest payments

Source: Australian Government, Budget strategy and outlook: budget paper no. 1: 2019–20, statement 10, p. 10-11 and 10-12.

Medium-term fiscal strategy

The Government has set out a medium-term strategy to achieve budget surpluses, on average, over the economic cycle. The Government has projected a UCB surplus of 2.0 per cent of GDP by 2029–30. It has also committed to maintain tax receipts as a share of GDP below 23.9 per cent until 2029–30 (with total receipts projected to be around 25.5 per cent of GDP in 2029–30). In order to achieve a 2.0 per cent of GDP surplus while maintaining a cap on tax receipts, payments as a share of GDP are projected to fall from 24.5 per cent of GDP in 2022–23 to around 23.5 per cent of GDP by 2029–30.

The Government has also stated an intention to eliminate the Commonwealth’s net debt by 2029–30.

However, it is important to note that there is considerable uncertainty inherent in projections, both fiscal and economic, made over the long-term.

Changes in the fiscal position since MYEFO

There is expected to be improvement in the forecast fiscal position in 2018–19 and 2019–20 relative to the 2018–19 MYEFO. However, the fiscal position is expected to be slightly worse than previously projected at in 2020–21 and 2021–22. 

Figure 4 shows the change in the UCB since the 2018–19 MYEFO. The UCB is expected to be higher in 2018–19 and 2019–20, but the surpluses in 2020–21 and 2021–22 are expected to be smaller than previously forecast.

Figure 4: policy and parameter variations—impact on the underlying cash balance

Policy and parameter variations—impact on the underlying cash balance

Source: Australian Government, Budget strategy and outlook: budget paper no. 1: 2019–20, statement 3, p. 3-19.

Parameter variations (changes in payments and receipts as a result of underlying economic and demographic conditions) are expected to improve the UCB across the forward estimates (although by a relatively small amount in 2020–21 and 2021–22).

Better than expected commodity prices are expected to improve economic growth and Australia’s terms of trade in the short term, driving tax receipts, and particularly company tax receipts, higher in those years. However, GDP is anticipated to be slightly weaker in 2020–21 and 2021–22 than previously forecast.

GST receipts are anticipated to be lower in each year of the forward estimates, reflecting downward revisions in consumption and new dwelling investment. This has a corresponding effect on payments of GST revenues to the states and territories. Payments are expected to be lower than previously forecast in the 2018–19 MYEFO across each year of the forward estimates. 

New policy decisions taken by the Government in the 2019–20 Budget are expected to offset the effect of these parameter variations on the UCB, reducing the UCB by $13.3 billion over the five years to
2022–23. These policy decisions are explored in more detail in the remainder of the Budget Review, but include:

  • the extension of the Government’s personal income tax plan
  • new infrastructure spending and
  • an increase in funding for medical services and funding for the Royal Commission into violence abuse, neglect and exploitation of people with a disability.

These are offset by additional revenue as a result of an extension of the Australian Taxation Office tax avoidance taskforce for multinationals and reduced expenses due to the Government’s better use of income data matching to reduce over-payments of Government transfers.   

The changes in fiscal aggregates since the 2018-19 MYEFO are detailed further in tables 2, 3 and 4 below.

Table 2: underlying cash balance at 2019–20 Budget relative to 2018–19 MYEFO

$ billion 2018–19 2019–20 2020–21 2021–22 2022–23
Receipts 485.2 505.5 522.3 551.0 566.9
as at MYEFO  482.1  506.0  526.4  554.8 n/a
Change since MYEFO 3.1 0.5 –4.1 –3.8 n/a
Payments 482.7 493.3 511.3 533.2 557.7
as at MYEFO  483.4  497.4  513.9  535.8 n/a
Change since MYEFO –0.7 –4.1 –2.6 –2.6 n/a
Net future fund earnings 3.9 4.6 n/a n/a n/a
as at MYEFO  3.9  4.6 n/a n/a n/a
Change since MYEFO
Underlying cash balance –4.2 7.1 11.0 17.8 9.2
as at MYEFO –5.2  4.1  12.5  19.0 7.1
Change since MYEFO 1.0 3.0 –1.5 –1.2 2.1
% of GDP 2018–19 2019–20 2020–21 2021–22 2022–23
Receipts 25.0 25.2 25.1 25.4 25.0
as at MYEFO  24.9  25.3  25.2  25.5 n/a
Change since MYEFO 1.0 –0.1 –0.1 –0.1 n/a
Payments 24.9 24.6 24.6 24.5 24.5
as at MYEFO  24.9  24.8  24.6  24.6 n/a
Change since MYEFO –0.2 –0.1 n/a
Underlying cash balance –0.2 0.4 0.5 0.8 0.4
as at MYEFO –0.3  0.2  0.6  0.9 n/a
Change since MYEFO 0.1 0.2 –0.1 –0.1 n/a

Sources: Australian Government, Budget strategy and outlook: budget paper no. 1: 2019–20, statement 10, pp. 10-5 and 10-6.  Australian Government, Mid-year economic and fiscal outlook: 2018–19.pp.307-308

Table 3: fiscal balance at 2019–20 Budget relative to 2018–19 MYEFO

$ billion 2018–19 2019–20 2020–21 2021–22 2022–23
Revenue 495.8 513.8 534.3 564.7 580.5
as at MYEFO  493.3  514.5  538.2  568.3 n/a
Change since MYEFO 2.5 –0.7 –3.9 –3.6 n/a
Expenditure 487.3 500.9 516.1 535.9 559.9
as at MYEFO  488.4  504.4  517.8  538.6 n/a
Change since MYEFO –1.1 –3.5 –1.7 –2.7 n/a
Net Operating Balance 8.5 12.9 18.2 28.8 20.6
as at MYEFO  4.9  10.1  20.4  29.8 n/a
Change since MYEFO 3.6 2.8 –2.2 –1.0 n/a
Net Capital Investment 6.5 4.7 7.7 9.7 10.8
as at MYEFO  6.8  5.8  8.1  9.8 n/a
Change since MYEFO –0.3 –1.1 –0.4 –0.1 n/a
Fiscal Balance 2.0 8.1 10.4 19.1 9.8
as at MYEFO –1.9  4.3  12.3  20.0 n/a
Change since MYEFO 3.0 3.8 –1.9 –0.9 n/a
% of GDP 2018–19 2019–20 2020–21 2021–22 2022–23
Revenue 25.6 25.6 25.7 26.0 25.6
as at MYEFO  25.5  25.7  25.8  26.1 n/a
Change since MYEFO 0.1 –0.1 –0.1 –0.1 n/a
Expenditure 25.1 25.0 24.8 24.7 24.6
as at MYEFO  25.2  25.2  24.8  24.7 n/a
Change since MYEFO –0.1 –0.2 n/a
Net Operating Balance 0.4 0.6 0.9 1.3 0.9
as at MYEFO  0.3  0.5  1.0  1.4 n/a
Change since MYEFO 0.1 0.1 –0.1 –0.1 n/a
Net Capital Investment 0.3 0.2 0.4 0.4 0.5
as at MYEFO  0.4  0.3  0.4  0.4 n/a
Change since MYEFO –0.1 –0.1 n/a
Fiscal Balance 0.1 0.4 0.5 0.9 0.4
as at MYEFO –0.1 0.2 0.6 0.9 n/a
Change since MYEFO 0.2 0.2 –0.1 n/a

Sources: Australian Government, Budget strategy and outlook: budget paper no. 1: 2019–20, statement 10, p. 10-15.
Australian Government, Mid-year economic and fiscal outlook: 2018–19, p. 317

Table 4: net debt and interest payments at 2019–20 Budget relative to 2018–19 MYEFO

$ Billion 2018–19 2019–20 2020–21 2021–22 2022–23
Net debt 373.5 361.0 349.5 333.2 326.1
as at MYEFO  351.9  343.4  329.9  312.6 n/a
Change since MYEFO 21.6 17.6 19.6 20.6 n/a
Net interest payments 14.1 10.9 10.4 9.4 n/a
as at MYEFO  14.0  11.5  11.3  10.4 n/a
Change since MYEFO 0.1 –0.6 –0.9 –1.0 n/a
% of GDP 2018–19 2019–20 2020–21 2021–22 2022–23
Net debt 19.2 18.0 16.8 15.3 14.4
as at MYEFO  18.2  17.1  15.8  14.3 n/a
Change since MYEFO 1.0 0.9 1.0 1.0 n/a
Net interest payments 0.7 0.5 0.5 0.4 0.4
as at MYEFO 0.7 0.6 0.5 0.5 n/a
Change since MYEFO –0.1 –0.1 n/a

Source: Australian Government, Budget strategy and outlook: budget paper no. 1: 2019–20, statement 10, p. 10-11 and p. 10-11  
Australian Government, Mid-year economic and fiscal outlook: 2018–19 pp.313-314


[1].          Statement 2 in Budget strategy and outlook: budget paper no. 1: 2019-20 notes that the spot price of iron ore is forecast to fall over the year to reach US$55 per tonne free-on-board by the end of the March quarter 2020, but it does not identify which price has been used in the Budget forecasts (p. 2-5).

[2].          Expanding this confidence limit to 90 per cent, the interval expands from 2 per cent up to 6 per cent (Australian Government, Budget strategy and outlook: budget paper no. 1: 2019-20, p. 7-7).

 

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