As widely expected the Government’s Mid-Year Economic and Fiscal Outlook saw a further improvement in budget projections, with this year’s deficit projection cut to -$5.2bn or -0.3% of GDP (from -$14.5bn in the May Budget)and the 2019-20 surplus projected to be around +$4.1bn or +0.2% of GDP (up from +$2.2bn in May), with future surpluses looking even stronger. This was due to stronger-than-expected tax collections (helped by higher commodity prices and employment and lower outlays), partly offset by fiscal easing measures since the May Budget.

The surplus on current policy is projected to reach $19bn or +0.9% of GDP by 2021-20.

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.

Source: Australian Treasury, AMP Capital 

The improved budget outlook provides some scope for the Government to announce somewhat bigger and earlier income tax cuts (than already legislated following the May Budget) and other pre-election goodies ahead of next May’s election. This looks to have been partly allowed for with the MYEFO putting aside $3bn in “decisions taken, but not yet announced”, but looks to be smaller than we have been allowing for. Earlier tax cuts from July next year will likely help households, but are only likely to be a partial offset to the drag from a negative wealth effect as house prices continue to fall. 

The big risk of course is that revenue growth is weaker than the 7.9% that the Government is projecting for this financial year (and the 5.6% pa on average projected over the next four years), as slower Chinese growth weighs on commodity prices, jobs growth slows, and wages growth remains weak. In this regards the Government’s economic projections for 2019-20 of 3% GDP growth, 2.25% inflation and 3% wages growth are a bit on the optimistic side. 

Overall, today’s budget update is good news and confirms that the budget is moving in the right direction after a record run of deficits. However, the risks to the growth and wages outlook along with the prospect for fiscal stimulus next year suggest that it may not get a lot better than this.

The projected improvement in the budget outlook is not enough to change the RBA’s view on the economy – of most interest will be the size of any pre-election fiscal stimulus in next April’s budget. 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.