Australian surplus will be delayed: economic update for SMSFs
As the economy continues to rebalance in the wake of the mining downturn, The Reserve Bank of Australia’s (RBA) decision to hold interest rates this month has not come as a surprise. For 2016, the risks on rates are all skewed to the downside – it will be very hard to see the RBA raising rates
We expect that the RBA will lower Australia’s cash interest rate by 0.25% to 1.75% in early 2016.
Australia's Federal Budget deteriorates again with the surplus delayed till 2020-21
On Tuesday, Australia’s Federal Treasurer Scott Morrison provided an update on the Federal Budget (known as the Mid-Year Economic and Fiscal Outlook, or MYEFO.
- There has been a further significant deterioration in the Budget deficit forecasts for the next four years given weaker global commodity prices and Australia’s subdued economic growth prospects.
- The revised MYEFO forecast for this fiscal year’s 2015-16 is a Federal Budget deficit of A$ - 37.4 billion. This represents a deterioration in the deficit from the initial A$ 35.1 billion estimate back in May 2015. So, Australia’s budget deficit has increased from -2.1% of nominal gross domestic product (GDP) to -2.3% for 2015-16 (see table 1 below).
- This Budget deterioration primarily reflects lower company tax receipts (due to the lower commodity prices) and the ‘moderate’ outlook for inflation and wages. There are some budget spending cuts over the next four years which are targeting welfare and health spending. Whether these spending cuts will actually be passed by the Senate in a federal election year is a very debatable proposition.
- This MYEFO implies a further delay in achieving a Federal Budget surplus by another year until 2020-21. This surplus remains very dependent on strong gains in nominal Budget revenue (averaging +6.2% annually from 2016-17) and constrained government spending (averaging +4.1% from 2016-17).
Table 1: Budget aggregates
Source: Treasury projections
The Federal Treasury has also provided updated economic activity forecasts (see table 2). It can be seen that:
- Australia’s Real GDP growth forecasts for 2015-16 has been downgraded from 2.75% to 2.5%.
- The iron ore price forecast has been downgraded from US$48 per tonne to US$39 per tonne. This commodity price fall is expected to detract around A$7 billion from forecasts tax receipts over the four years of forward estimates.
- Australia’s employment growth is expected to moderate from 2.0% in 2015-16 to 1.75% in the next financial year. The unemployment rate is forecast to remain steady at 6.0% but this is a welcome improvement on last May Budget’s forecast of 6.5% for 2015-16.
- Australia’s inflation rate is projected to be subdued at 2.0% this financial year and only gradually move higher to 2.25% next financial year. Since that inflation remains at the lower end of the target range of 2% to 3%, this implies scope for the RBA to consider cutting interest rates in 2016.
Table 2: Major economic parameters(a)
Given Australia’s recent economic activity has been sedate and is likely to remain given the transition after the mining investment boom, this MYEFO Federal Budget announcement just provides confirmation of the current subdued reality.
The new year is expected to bring more of the same in terms of constrained growth in Australia and globally. That is, constrained but gradual growth. This is because conditions for a downturn or conversely, for a surge in growth, aren’t in place. Investors holding a balanced portfolio can expect a return of around 7.5 to 8%.
About the author
Head of Investment Strategy and Economics and Chief Economist at AMP Capital, Shane is responsible for AMP Capital's diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.