Australian Federal budget 2017 Preview: $27.7bn deficit, a $1.0bn upgrade – Westpac

The analysis team at Westpac points out that Australia’s budget 2017 is to be announced by the Federal Treasurer on Tuesday night, May 9 and Westpac expects that the existing profile for the underlying cash balance, with a return to surplus in 2020/21, will be largely confirmed.

Key Quotes

“Westpac Economics expects the underlying deficit for 2017/18 to be announced as $27.7bn, an upgrade of $1bn from the Government’s December forecast in the Mid-Year Economic and Fiscal Outlook (MYEFO). Across the four years to 2020/21 the improvement is $3bn.”

“The budget deficit narrows only gradually across the four years, by around 0.5% of GDP each year, and edges into surplus in 2020/21 (0.2% of GDP), after 12 consecutive years of deficit.”

“These estimates are likely to be based on the commodity price forecasts used in the December MYEFO. Notably, the iron ore price is expected to be US$55/t fob, reaching that point in December 2017, one quarter later than assumed in MYEFO. Currently, the fob price is around $63/t.”

“However, based on our own more pessimistic forecast profile for commodity prices we expect that the budget will still print a deficit in 2020/21 of around $5 billion.”

“The economic outlook is slightly more positive than MYEFO based on an improved global backdrop although the good news on higher commodity prices has already been factored into MYEFO.”

“On the Government's forecasts for real GDP growth we expect an upgrade to 2017/18, to 3.0% from 2.75%, but a downgrade to 2018/19, to 2.75% from 3.0%, as home building activity turns down. We concur with that expected slowdown.”

“That yields a profile for real GDP growth from 2017/18 of: 3.0%, 2.75%, 3.0% and 3.0%.”

“The profile for nominal GDP growth from 2017/18 is: 4.25% (+0.5%), 4.0% (-0.25%), 4.5% and 4.5%. By comparison our nominal GDP profile is: 3.8%, 2.8%, 4.25% and 4.25%.”

“On policy measures, we expect a net neutral impact on the budget. The 'zombie' savings measures - those stuck in the Senate since 2014 and estimated at $12.4 billion over the four years are to be removed. There will be some modest new spending, such as on schools.”

“We expect savings measures, a mixture of expenditure (including universities and welfare) and revenue (possibly including extending the Medicare levy surcharge to all high income earners), to fully offset new spending and the removal of the 'zombie' measures.”