Positive economic signs pepping up Budget forecasts

On 11 May, Treasurer Josh Frydenberg will take centre stage in Federal Parliament to announce the forecast Budget deficit for the 2021-22 year.

Barring a last-minute miracle, it will be a deficit; the Covid-19 Budget deficit of $213 billion announced last October ensures there will be plenty of red ink for quite a few years.

But there is some cause for mild optimism, given the rebounding economy.

And it’s also a cautionary tale for the public: the forecast outcome announced on Budget night is precisely that – a forecast. While the Budget night coverage focuses on the headline figure, the actual deficit or surplus is yet to be realised or delivered.

A lot can change within a year, or even within weeks. Just look at what Covid-19 has done.

For example, in December 2019 the Treasurer was pleased to announce that a surplus of $5 billion was “expected to be delivered” in the 2019-20 year.

Within months, that forecast was out the window as the Government responded with its monster Covid-19 package, which included $130 billion for JobKeeper.

Fortunately for the Treasurer and his Treasury department, the economic tidings since last October’s Budget have been on the upside.

Two months after the Budget, the Treasurer reported in the Mid-Year Economic and Fiscal Outlook that the deficit for 2020-21 was forecast to be $197.7 billion.

That improvement in the budget bottom line reflected the faster-than-anticipated recovery from the Covid-19 restrictions.

For the Federal Government, there are a couple of factors working to the advantage of this year’s final Budget outcome.

First, the economy has bounced back strongly, recording growth of more than three per cent in GDP in both the September and December quarters of 2020.

Second, unemployment has fallen quickly, with the jobless rate of 5.6 per cent registered in March receding toward the pre-Covid rate of 5.2 per cent recorded 12 months earlier. While the wind-up of JobKeeper may push out jobless numbers, it will be easier to find a job in a growing economy. Higher employment also means more taxes paid and less paid out in welfare payments.

Third, the price of an export staple, iron ore, has been crucial to national income. The 2020-21 Budget papers were predicated on the iron ore price declining to US$55 a tonne by the end of June this year; in late April, the price was hovering above US$180 a tonne. And a quarterly report issued in March by the Department of Industry, Science, Energy and Resources forecast that Australia’s iron ore export earnings would in 2020-21 reach a record high of $136 billion - $13 billion higher than the previous forecast in December.

Meanwhile, Australia continues to post solid trade surpluses, and not just through iron ore exports. In February, it recorded its third straight month of trade surpluses above $8 billion, boosted by strong export performances of cereals, coal, meat and petroleum.

Higher export income translates into stronger economic growth and for the government, higher tax receipts.

Of course, export of services – such as inbound tourism and enrolment of international students – remain hampered by international travel restrictions.

And Treasury’s assumptions in the October Budget papers were based on an ongoing containment of Covid-19 outbreaks.

It also assumed that a population-wide Australian Covid-19 vaccination program would be fully in place by late 2021. Such a scenario is crucial for the Australian economy, especially for companies and individuals operating in the international services market.

As the Budget bottom line improves, the Government faces the task of containing expectations. Amid a rosier economic outlook, it must convince the broader public that the days of budget repair, en route to an eventual budget surplus, are not over by a long shot.

Gavin Clancy is a Senior Consultant with Lunik