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September, 2018 7:36 AM



Budget position continues to improve

Budget position continues to improve

In the twelve months to May 2018, the Budget deficit stood at $12.8 billion (less than 0.7 per cent of GDP) up from $12.1 billion in the year to April...

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02.07.2018 03:57 PM

Budget position continues to improve
Monthly Budget statement

Budget improves: In the twelve months to May 2018, the Budget deficit stood at $12.8 billion (less than 0.7 per cent of GDP) up from $12.1 billion in the year to April – the smallest rolling annual deficit for nine years.

What does it all mean?

• Australia’s fiscal situation continues to improve. Late last year, the government’s finance boffins mapped out where the budget should be each month in order to hit the target of a $23.6 billion deficit for the full 2017/18 year. At May 2018, the profile deficit was expected to be $15.8 billion. The actual result was $10.02 billion, a 37 per cent improvement.

• And almost two months ago the Government said this year’s budget deficit was likely to be $18.2 billion. It’s possible a raft of spending measures could inflate the June accounts. But for the Government’s full-year 2017/18 deficit to be realised, a deficit of $8,130 million will need to be recorded over June (the biggest June deficit in four years) and compared with a $2,724 million deficit in June last year.

• For the 11 months to May the operating balance is almost $2 billion in surplus – over $7 billion better than expected. The fiscal balance is also in surplus of $1.1 billion - $7 billion better than expected.

• The Department of Finance says that revenues are up $3.2 billion on the ‘profile’ position and payments are over $2.7 billion below where they were expected to be. In other words record employment growth and company profits have boosted government revenues. And the government has trimmed its spending at the same time.

• The rolling annual underlying deficit stands at $12.8 billion. The annual deficit had narrowed to just $12.095 billion in the 12 months to April, so there has been slippage. But from October last year to May this year the rolling annual deficit has improved from almost $32 billion to just $12.8 billion. The underlying budget remains on track to surplus.

What do the figures show?

• In the 12 months to May 2018, the Budget deficit stood at $12.83 billion (around 0.7 per cent of GDP), up from $12.10 billion in the year to April – the smallest rolling annual deficit for nine years.

• Smoothed revenues (twelve months to May) were up 8.0 per cent on a year ago – the fastest growth in five years. Expenses rose by 3.0 per cent over the same period, the slowest growth in 18 months.

• The Department of Finance noted: “The net operating balance for the year to 31 May 2018 was a surplus of $1,852 million, which is $7,301 million better than the 2017-18 Revised Budget profile deficit of $5,449 million. The difference primarily results from higher than expected revenue and lower expenses.”

• In terms of the underlying cash balance, “The underlying cash balance for the financial year to 31 May 2018 was a deficit of $10,016 million, which is $5,762 million lower than the 2017-18 Revised Budget profile deficit of $15,778 million.”

Receipts: “Total receipts were $3,200 million higher than the 2017-18 Revised Budget profile.”

Payments: “Total payments were $2,704 million lower than the 2017-18 Revised Budget profile.”

• The Government currently expects an underlying deficit of $18.2 billion for 2017/18 and a deficit of $14.5 billion in 2018/19.

• Receipts from the Goods and Services Tax stood at $65.6 billion in the twelve months to May, up 4.5 per cent on a year ago. The Government has forecast GST receipts of $65.56 billion for the entire 2017/18 year.

• Actual GST receipts for the 11 months to May stood at $62.03 billion, close to the Budget ‘profile’ of $62.44 billion.

What is the importance of the economic data?

• The Department of Finance releases the Government Financial Statements (Niemeyer Statement) almost every month. The statement allows investors to track the current Budget position and provides insights into the effectiveness of fiscal policy.

What are the implications for interest rates and investors?

• The Federal Budget is improving. Higher tax revenues and lower growth in expenses are both contributing to a better fiscal position.

• Unfortunately the risk remains that the windfall gains may entice both sides of politics to engage in a round of spending promises ahead of the next election.

• A narrowing budget deficit is contractionary. Budget spending is growing, but at a slower pace and the government is withdrawing more tax receipts from the economy. Still, from a capital perspective, governments are still investing in infrastructure, so it is adding to economic momentum, lifting jobs, profits and thus taxes.

Published by Craig James, Chief Economist, CommSec
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