Australia‘s economy will come back to ‘haunt‘ Scott Morrison‘s optimistic budget projections

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  • Australia’s budget position is the best it’s been in the post-GFC era, helped by stronger commodity prices and employment growth over the past year.
  • Capital Economics warns the economy will return to “haunt” Scott Morrison by not replicating the strength seen in the past year.
  • It says tax relief and the government’s stronger fiscal forecasts were only possible due to upward revisions to many of its economic assumptions.

Australia’s budget position is currently the best it’s been since before the global financial crisis, helped by stronger

It has allowed treasurer Scott Morrison to cut income taxes and project a return to a budget surplus one year ahead of schedule, an outcome that few would have expected just 12 months ago.

However, as any forecaster knows, it’s always dangerous to extrapolate near-term movements over a longer time horizon.

To Paul Dales and Kate Hickie, economists at Capital Economics, that’s exactly what the government has done, warning that even if the Coalition wins next year’s election, Morrison may not be able to fulfill his election promises.

“We suspect the economy will return to haunt him by not being as obliging in future years,” they said following the budget’s release.

In particular, Dales and Hickie say the government’s revised budget projection — forecasting smaller near-term deficits and larger long-term surpluses — was only possible due to good news on the economy over the past year and some strong hopes for the performance of the economy over the next few years.

“The real trick in the budget was that the Treasurer managed to provide a net giveaway while projecting smaller budget deficits and larger budget surpluses,” they said.

“This is all only possible due to the good news on the economy over the past year and some strong hopes for the performance of the economy over the next few years.

“Indeed, such tweaks meant that over the next few years an extra $35 billion is expected to flow into the Treasury’s coffers.”

Capital Economics

Dales and Hickie say the combination of tax relief and stronger fiscal forecasts were only possible due to upward revisions to many of the government’s economic assumptions.

“Relative to the projections in December’s MYEFO, new policy decisions have worsened the underlying budget balance by a cumulative $14.9 billion over the five years from 2017/18 to 2021/22,” they said.

“Instead, all of the improvement came from a $35.1 billion windfall due to more favourable economic parameters.”

While the government made for real GDP and consumption growth, Dales and Hickie say the most significant revision was made to its forecasts for employment growth in the current financial year, driven by stronger-than-expected jobs growth that delivered unexpected income tax revenues as a consequence.

“Most importantly, following the exceptionally strong rates of jobs growth throughout 2017, the Treasurer revised up his forecast for employment growth in 2017/18 from 1.75% to 2.75%,” they said.

“This has led to a significant upward revision in forecasts for income tax receipts of $13 billion over four years.”

Despite a in the post-GFC era, the government also retained its rosy forecasts for wage pressures, looking for Australia’s wage price index to accelerate to despite an expectation that unemployment will remain entrenched above 5%.

“The Treasurer expects annual growth in the wage price index to average 2.75% in 2018/19 and pick-up to 3.25% by 2019/20, while the unemployment rate is expected to fall to 5.25% by 2018/18 and stay there,” they said.

Dales and Hickie say the process of extrapolating near-term economic performance over the longer term means the risks to the budget forecasts are slanted to the downside.

“We’re not convinced the economy will live up to the Treasurer’s expectations as wage growth will probably remain low and the housing market will probably weaken further,” they said.

“If so, then the budget won’t return to surplus as soon as expected and net debt will remain higher for longer.

“That means whoever is Treasurer after next year’s election will have to acknowledge that the fiscal outlook is not as rosy as Morrison has suggested.”

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