MYEFO forecasts lower deficit, higher surplus for 2019/20

The Australian federal government has presented their Mid-year Economic and Fiscal Outlook (MYEFO) to their budget for 2018/19. The Treasurer announced the deficit for 2018/19 is now forecast to be $A5.2bn, or 0.3% of real Gross Domestic Product (GDP), which has been lowered from the initial estimate of -$A14.5bn (0.8% of GDP) from budget night back in May. The surplus forecast for 2019/20 has been upgraded to $A4.1bn (0.2% of GDP) from $A2.2bn (0.1% of GDP). 

The improvement in the budget for 2018/19 is driven by stronger economic conditions, reflecting stronger-than-forecast growth in employment and national income flowing from higher prices for key commodity exports (iron-ore and coal), which have also had an impact over the ensuing years. The impact of stronger economic conditions boosts the budget position by a total of $31.3bn over the next 4 years; $11.2bn in 2018/19, $5.8bn in 2019/20, $7.2bn in 2020/21 and $7.1bn in 2021/22.  

The boost from stronger economic conditions is moderated by the cost of implementing new policy measures, which are a net $16.3bn over the coming 4 years; $1.9bn in 2018/19, $4.0bn in 2019/20, $5.7bn in 2020/21 and $4.8bn in 2021/22. Ahead of next year's federal election, the MYEFO documents show that 'decisions taken but not yet announced' lower revenues by around $9.3bn between 2019/20 to 2021/22 — potentially reflecting the cost of implementing tax cuts. Meanwhile, expenses relating to 'decisions taken but not yet announced' total around $1.4bn between 2018/19 to 2021/22. 

As a result of stronger economic conditions ($31.3bn) and the cost of new policy measures ($16.3bn), the net improvement to the budget is $15.0bn over the next 4 years. The budget position improves by $9.3bn to a deficit of $5.2 in 2018/19, before a $1.9bn improvement in 2019/20 to return the budget to surplus for the first time in 12 years at $4.1bn. The projections then show surpluses of $12.5bn in 2020/21 (an upgrade of $1.5bn) and $19.0bn in 2021/22 (upgraded by $2.3bn). Collectively, the budget is now forecast to be in surplus in the order of $30.4bn out to the end of 2021/22, which nearly doubles the $15.3bn surplus forecast in May's budget.


Turning to the updated economic forecasts, Treasury has upgraded their assessment for nominal GDP growth in 2018/19 by 1ppt to 4.75% to reflect the impact of stronger-than-expected prices for key commodity exports. The forecast prices for iron-ore (US$55/t) and coal (metallurgical US$120/t and thermal US$93/t) from May's budget have proven to be conservative but have been retained by Treasury in MYEFO. Nominal GDP growth for 2019/20 has been downgraded from 4.75% to 3.5%, with the terms of trade now expected to decline by 6% compared to 2.25% reducation that was forecast in May's budget.  

In terms of real GDP growth, the only change was that near-term expectations have been lowered to 2.75% from 3.0%. These forecasts are slightly softer than those published by the Reserve Bank of Australia. 

With output growth forecast to remain at an around-trend pace, the outlook for employment growth has been strengthened by 0.25ppt in each of the coming years. Meanwhile, the nation's unemployment rate is forecast to hold at 5% out to 2021/22. Forecasts for growth in the Wage Price Index have been lowered in 2018/19 and 2019/20 by 0.25ppt but retained at a very strong 3.5% pace in 2020/21 and 2021/22.