Australia: Federal Budget appears to contain little shift in the government’s overall fiscal stance - NAB

The analysis team at NAB, explains that attempting to look through the “good” and the “bad”, at first blush this year’s federal budget appears to contain little shift in the government’s overall fiscal stance as measured by key budget aggregates over the next couple of years, although it includes a more rapid improvement in the fiscal balance towards the end of the projection period.

Key Quotes

“Fiscal policy remains moderately contractionary over the four-year estimates period, although greater expenditure on infrastructure and education relative to the Mid-year Economic Outlook should have some positive impact on Australia’s long-term growth prospects.”

“The government has retained its forecasts for the underlying cash balance to return to surplus in 2020-21. This is despite slightly higher deficits in the next two years even with the boost from temporarily higher coal and iron ore prices.”

“In a departure from tradition, the Government is now also emphasising the operating balance, which aims to measure recurrent revenue less expenses and removes net capital expenditure.”

“While we take no issue with the government’s economic growth estimates for 2016-17 and 2017-18, we see downside risks to the projected 3% p.a. growth between 2018-19 and 2020-21. This rate of growth is higher than Treasury’s own estimate of potential growth for Australia of ~2¾% p.a. (although the government may argue that investment in infrastructure and education in this budget will be shifting that dial). NAB’s forecasts see real GDP growth of 2.9% in 2017-18 (similar to the Government’s 2.75% estimate) but only 2.4% in 2018-19, before growth reverts to our (lower) long-run growth estimate of ~2½% p.a.”

“Looking at the “parameter variations” versus “policy changes”, windfall gains from higher commodity prices in 2016-17 and particularly 2017-18 have largely been used to fund higher expenditure. Parameter variations account for much of the (very large) improvement in the budget balance in 2019-20.”

“The government is spending somewhat more freely in this Budget, projecting growth in payments to average 4.2% over the four years to 2020-21; while similar to estimated growth in 2016-17, this is higher than in the two prior years. As a percentage of GDP, payments are forecast to rise to 25.4% of GDP by 2018-19 before moving lower to 25% in 2019-20 (not significantly different, on average, to the 25.2% between 2016-17 and 2019-20 as at MYEFO).”

“Net government debt is expected to peak in 2018-19 at 19.8% of GDP, compared to the MYEFO estimate of 19% of GDP, and edges lower thereafter. Part, but not all, of the increase in net debt since MYEFO is due to changes in accounting standards. Net implied CGS issuance is expected to be $38 bn in 2017-18, compared with $43 at MYEFO and $81 bn in 2016-17, with an outstanding face value at $537bn. Despite, all the talk of“good” and “bad” debt, pre budget, the emphasis remained on total net debt, but with added focus on the net operating balance.”

“While we agree with the shift in emphasis away from demonising all forms of debt, and agree that the government should take advantage of historically low funding costs, scrutiny over project selection remains paramount and funds must be channelled into productivity-enhancing investments. Ultimately, all debt must be repaid, and ratings agencies will continue to focus on aggregate debt measures. While net debt is a bit higher than projected at MYEFO, partly due to accounting changes, with little change in the path back to surplus beyond 2017-18 and net debt projected to gradually decrease beyond 2018-19, our initial impression is that these figures will not alter Australia’s AAA credit rating, nor remove the negative outlook.”