Morrison has donned rose tinted glasses

Stephen Koukoulas

Market Economics Pty Ltd

Morrison is hoping that the economy will miraculously pick up, leading to a surge in tax revenue which feeds into the estimate of a return to budget surplus in 2020-21. Suffice to say, any shortfall in what would be a strong performance in the economy will lead to yet another blow out in the deficit and the return to surplus will be pushed back yet another year or two.

It is usually unwise to quibble with Treasury budget forecasts, but the forecasts underpinning the budget numbers are very rosy. Few, if any, independent forecasters have such a positive outlook for the economy. They are suggesting growth will be softer than assumed by Treasury and this is for good reason.

In terms of the immediate outlook, the economic news has confirmed:

-   Two consecutive months where retail sales have fallen. Retail sales account for approximately 20 per cent of GDP so this is not good news.

-   A sharp fall in residential building approvals which are now down 20 per cent over the past year. There seems little doubt that dwelling construction will fall away during 2018 and 2019.

-   Evidence that Sydney house prices have fallen around 1.3 per cent over the past month, signalling, just perhaps, that the housing boom is not only ending, but is heading for something more sinister.

-   The iron ore price has fallen to around US$60 a tonne (approximately US$55 FOB) which is the level Treasury has used when framing its tax revenue estimates. The budget papers reveal that every US$1 move in the iron ore price would impact the budget bottom line by $420 million in 2018-19 terms. In other words, if iron ore prices drop to the current consensus levels, around US$15 below the current price, the budget deficit will blow out by $25 billion over 4 years.

There is also an important forecast in the budget that the unemployment rate edges down from the current 5.9 per cent to 5.25 per cent in June 2020 and that wages growth will accelerate from the current record low 1.9 per cent to a pre-boom pace of 3.75 per cent in June 2021.

At the moment, there are more than 750,000 people unemployed, and a further 1.1 million underemployed. These numbers are rising and there is nothing in the run of recent news to suggest and reversal in the near term. As such, the ability of workers to get a pay rise is limited, and the budget estimates for a surge in wages growth is built on foundations of sand. Any shortfall in wages growth will mean lower income tax collections, weaker spending and lower GST receipts.

While economic policies are the centre piece of most budgets, the performance of the economy is vital for delivering revenue to the budget bottom line.

This budget is framed on a range of upbeat economic forecasts and if there is even a marginal shortfall in the economy relative to those forecasts, the budget deficit and level of government debt will yet again be revised higher.

Stephen Koukoulas
Chief Economist
Market Economics Pty Ltd

Stephen Koukoulas has a rare and specialised professional experience over more than 25 years as an economist in government, as Global Head of economic and market research, a Chief Economist for two major banks and as economic advisor to the Prime...


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