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Budget update sets scene for fiscal showdown

Glenn Freeman  |  17 Dec 2018Text size  Decrease  Increase  |  
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Tax cuts are one of the few bright spots in the Coalition’s pre-election budget update, says a leading economist, who fears they are overshadowed by declining house prices and China's slowing economy.

The Coalition released its budget update today, which emphasised its plan for up to $9 billion of tax cuts in the lead up to its final budget before a fiercely contested election in May.

This year's deficit projection has been cut to minus-$5.2 billion, from minus-$14.5 billion in May. The 2019-20 surplus is forecast to reach $4.1 billion – up from $2.2 billion earlier in the year.

AMP Capital chief economist Shane Oliver says this is due to higher tax collections than anticipated, driven largely by higher commodity prices, employment and lower costs. However, these were offset by "fiscal easing measures since the May budget".

"After years of consecutive deterioration seen in the budget deficit projections which has seen a record run of budget deficits, the improvement seen in recent budget updates is continuing. This is good news," he says.

This provides further scope for "bigger and earlier" income tax cuts than had been flagged previously – and will provide some support to households," Oliver says.

However, they will only partially offset the persistent "negative wealth effect", reflected most obviously as house prices across Australia's eastern states continue to fall.

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MYEFO won't shift RBA's outlook on Australia's economy, says AMP's Oliver

A slowing Chinese economy adds further weight to this threat, and Oliver's concerns that Australian economic growth misses the government's projected 7.9 per cent in 2018-19, and the 5.6 per cent average outlook to 2022.

"The government’s economic projections for 2019-20 of 3 per cent GDP growth, 2.25 per cent inflation and 3 per cent wages growth are a bit on the optimistic side," Oliver says.

As good as it gets

Oliver concedes the budget is good news and is "moving in the right direction after a record run of deficits". But he believes the risks to growth and wages, combined with the potential of interest rate increases next year, "suggest it may not get a lot better than this".

Oliver notes that a budget outlook is unlikely to have any effect on the RBA's view on the economy, or on AMP's view on its interest rate policy.

"There is nothing here to alter our view that the next move by the RBA will be to lower interest rates in the second half of next year."

Released each year by the end of January, or within six months of the last budget, MYEFO updates the economic and fiscal outlook from the previous budget. It also updates the government's budgetary position, in the context of policy decisions made since this time.


is senior editor for Morningstar Australia

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