RBA weighs in on deficit debate: CommSec's Savanth Sebastian

RBA weighs in on deficit debate: CommSec's Savanth Sebastian
RBA weighs in on deficit debate: CommSec's Savanth Sebastian

GUEST OBSERVER

There was never going to be any surprises in Federal Treasury’s assessment of the economy given the Federal Budget was released just over a fortnight ago. It wouldn’t have been a good look if there was significant discrepancies in key economic assumptions and Federal budget projections in such a short period.

To recap, Federal Treasury is tipping growth of around 2½ per cent in both 2015/16 and 2016/17. Employment growth is expected to remain “solid”  with the unemployment rate forecast to fall to 5½ per cent in the June quarter of 2017.

When it comes to nominal economic growth, once again it is expected to remain weak at just 2½ percent this year before lifting to 4¼ percent in 2016/17. However given the downside risks to inflation Federal Treasury has concede an interesting point when it comes to nominal growth outcomes.

“If inflation outcomes were consistent with the lower bound of the range presented in the RBA May 2016 Statement on Monetary Policy in the forecast period from 2015-16 to 2017-18, nominal GDP could be around 1. per cent lower by 2017-18”.  Overall a lower nominal GDP result would mean an even more prolonged period of budget deficits.

Interestingly not all the figures in the PEFO document were the same as the May Budget. The PEFO projects an underlying cash balance deficit of $40 billion in 2015/16 and the Federal Budget shows a deficit of $39.1 billion - essentially splitting hairs. But Federal Treasury goes on to explain that “parameter and other variations have resulted in a negative impact on the underlying cash balance of $103 million in 2015-16, reflecting a reduction in expected receipts from Unclaimed Superannuation Monies”. 

The deficit for 2016/17 was forecast to remain at $37.1 billion.

Overall the budget deficit and debt levels are low on a global scale but arguably could be lower. In fact the Reserve Bank has weighed into the debate on deficits. Reserve Bank Board member John Edwards has commented that the Government should seek “more plausible”  measures of deficit reduction.

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RBA weighs in on deficit debate: CommSec's Savanth Sebastian

In a wide ranging discussion with the Wall St Journal, Edwards suggests that a return to a balanced budget in two years should have been the government’s goal and that the government is at the risk of trying the patience of ratings agencies.

The $64 question is how businesses are feeling, an Election has been called and interest rates have been cut. There has been a modest slowdown in economic activity in the past few months. The bottom line is that Aussie businesses will only start to look at investing when the election is out of the road.

The PEFO highlights the challenges that lie ahead for the next Government. The hope would be that once the election is out of the way the Government would focus on changing the tax framework including discussions on the GST.

What do the figures show?

Pre-Election Economic & Fiscal Outlook (PEFO):

The budget deficit for 2015/16 is now estimated at $40 billion or 2.4 per cent of GDP, up from the earlier Federal Budget estimate of $39.9 billion. The 2016/17 budget deficit is tipped at $37.1 billion (2.2 per cent of GDP).

Looking further out: the 2017/18 budget deficit is forecast at $26.1 billion (1.4 per cent of GDP); the 2018/19 budget deficit $15.4 billion (0.8 per cent of GDP); 2019/20 budget deficit $5.9 billion (0.3 per cent of GDP).

Federal Treasury tips 2½ per cent economic growth in current year, in line with the May budget forecast.

The jobless rate is seen to fall to 5½ per cent by June 2017, in line with the May budget.

Nominal GDP expected to grow by 2½ per cent this year, before rising to 4¼ per cent in 2016/17.

Consumer price index to average 1¼ per cent this year, before rising to 2 per cent in 2016/17.

Net debt is expected to peak as a proportion of GDP in 2017/18 at 19.2 per cent ($347.1 billion) and fall to 17.8 per cent in 2019/20 ($355.4 billion).

Why is the data important?

The Pre-Election Economic & Fiscal Outlook  document is released by Federal Treasury after an election is called. It contains the latest economic assumptions and Budget projections.

What are the implications?

The PEFO document has no major implications for financial markets. The economy is locked in a holding pattern until the election is held.

The PEFO highlights the fact that all sources of government revenue should be up for review after the election.

No matter what party takes Government, there is a revenue problem to be addressed. And no option should be ruled out. Any responsible Government needs to assess all taxation measures and that includes the GST

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RBA weighs in on deficit debate: CommSec's Savanth Sebastian

Savanth Sebastian is an economist for CommSec

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Economy

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