Westpac sees fewer downside risks and scope for tax cuts

Westpac says uncertainty around the economic and fiscal outlook is ever present, but the downside risks have diminished somewhat relative to a year ago, with the world economy surprising to the upside.

The comments came ahead of the pending release by the Treasurer of the Federal Government's Mid-Year Economic & Fiscal Outlook (MYEFO) on Monday next week, December 18.

The 2017 half yearly budget update will likely see minimal changes to the economic and fiscal forecasts and projections, Westpac economist Andrew Hanlan suggests.

"That is a welcome change from the experience for much of the post GFC period, when Treasurers so often had to mark down the revenue outlook.

In the May 2017 Budget, the budget deficit was forecast to moderate from $29.4bn, 1.6% of GDP, in 2017/18 to be approaching balance in 2019/20 and then edge into surplus in 2020/21, a forecast $7.4bn, 0.4% of GDP. 

Economic growth in 2017/18, in nominal terms, is set to exceed the Budget forecast, at a likely 4.5% vs an expected 4.0%. The mix of activity differs, with consumer spending softer, offset by investment by businesses and government.

Commodity prices over past months proved to be more resilient than anticipated, boosting national income. More recently, commodity prices have moderated, suggesting that the MYEFO commodity price assumptions for the out years will be largely as in the Budget.

The MYEFO profile for nominal GDP growth for the three years from 2018/19 is expected to be: 3.75% (downgraded from 4.00%); 4.50% (unchanged); and 4.75% (unchanged). The downgrade to 2018/19 reflects the risk that real GDP growth is revised to 2.75% from 3.0%, incorporating a weaker starting position for the household sector. 

The revenue profile across the four years will be boosted by the stronger starting position for the economy, by an expected: $2.4bn, $1.4bn, $1.0bn and $1.1bn.

The expenditure profile is expected to be unchanged, with a modest $1bn undershoot on expenditures in 2017/18 to be offset by the cost of new policy measures.

On these figures, the cumulative deficit for the four years is $40bn, $6bn lower than at Budget time, with the profile of: -$27bn (a $2bn upgrade); -$20bn, -$1.5bn and +$8.5bn.

"The case could be made for modest personal income tax relief, potentially to be announced in the May 2018 Budget," Andrew Hanlan said.

"This could be along the lines of those announced in the May 2016 Budget, shifting the income tax thresholds, costing $4bn over four years.

"There is also the scope to amend the ten year company tax cut plan, which is already incorporated into the fiscal estimates."