Turning to the details, the $21.5bn deterioration in the budget position reflects a $13.5bn net impact from the downgraded economic outlook and a net $8.1bn in new spending. The softer economic impulse has a delayed impact hitting from 2020/21, where it has a net cost of $2.0bn, then $7.5bn in 2021/22 and $4.1bn in 2022/23. Over the period, receipts are impacted by $32.9bn driven by a lower tax in-take from individuals (-$7.4bn) and corporations (-$7.9bn), a reduced GST collection (-$9.9bn), as well as smaller excise and customs duties (-$2.1bn) and superannuation fund taxes (-$1.6bn).
A reduction in receipts is moderated lower payments, which have been marked down by $19.7bn out to 2022/23. Within this, there is an offsetting reduction in GST distributions to the states over the 4 years (-$9.9bn), debt servicing costs are down (-$3.9bn) in line with lower rates, and there were lower-than-expected take-ups from the Defence Housing Australia (-$1.3bn), Family Tax Benefit (-$1.2bn) and Student Payments (-$0.7bn) initiatives.
The net $8.1bn in new spending provides a boost to the economy of $2.2bn in 2019/20, $2.9bn in 2020/21, $2.0bn in 2021/22 before fading to $1.0bn in 2022/23. This spending centres on an accelerated roll-out of infrastructure projects, drought assistance measures and aged care services. The table (below) shows the revisions.
A comparison of the key forecasts in MYEFO and Budget 2019/20 are shown in the table, below. GDP growth for 2019/20 has been lowered by 0.5ppt to 2.25% to reflect a weaker starting point and a softer outlook. However, the expectation for growth to return to trend in 2020/21 and then rise to 3.0% in 2021/22 and 2022/23 was retained. These forecasts are in line with those published by the Reserve Bank of Australia for 2019/20 (2.25%) and 2020/21 (2.75%).
In nominal terms, GDP growth is still forecast to expand by a 3.25% pace in 2019/20, however; a sharp downgrade from 3.75% to 2.25% occurs in 2020/21 to reflect a sizeable 8.75% contraction in the terms of trade as commodity prices are expected to decline from elevated levels. On this front, as in Budget 2019/20, the iron ore price is forecast to retrace from its current level of around US$90/t to US$55/t, though the timing for this to occur was delayed by 3 months to the end of the June quarter in 2020. Meanwhile, the metallurgical coal price forecast was cut from US$150/t to US$134/t and thermal coal reduced from US$91/t to US$64/t. Nominal GDP growth then lifts by 4.75% in 2021/22 and 2022/23; an upgrade of 0.25ppt in each case.
Employment growth forecasts were left unchanged across the 4 years, though there was a notable downgrade in the profile for wages growth. The starting point for wages growth has been lowered from 2.75% to 2.5% and is then expected to remain at that pace in 2020/21 (previously forecast at 3.25%). It then firms to 2.75% in 2021/22 (previously 3.5%) and finally lifts to 3.0% in 2022/23 (previously 3.5%).
In summary, MYEFO conveys a softer domestic economic outlook that begins to impact the budget position from 2020/21 as the tax in-take moderates and commodity prices retrace. Accordingly, the budget is now in surplus by $23.5bn over the 4 years out to 2022/23, which is greatly reduced on the forecast for a total surplus of $45.0bn in Budget 2019/20. Given the government's pre-election commitment to return the budget to surplus, the softer economic outlook conveyed by MYEFO implies reduced scope for additional fiscal stimulus to be implemented. With the Australian economy tracking at a subdued below-trend pace of 1.7% over the year to Q3 (see here), monetary policy is likely to have more work to do in 2020.
Link to MYEFO 2019/20 here
Analysis of Budget 2019/20 here