Upgrade still leaves room for more stimulus
Bottom line: The Budget’s 18/19 headline Underlying Cash Balance (UCB) is forecast to be a modest deficit of -$5.2bn (from -$14.5b at Budget time), moving into an upgraded surplus of $4.1bn for 19-20 (from $2.2bn). Nearly all the improvement comes from revenue, assisted by a tighter labour market and increased company tax, especially from mining. While improving, the Budget’s 18/19 starting point arguably looks conservative: the UCB was already down to a deficit of just $2.3bn over the 12 months to October 2018, ahead of MYEFO. Likewise, the Net Operating Balance (NOB) notched a surplus of $5.4bn, ahead of MYEFO’s forecast of $4.9bn.
- The economy has been good to the Budget so far, but with housing risks rising and the Government behind in the polls, the improved Budget outlook provides room for some pre-election stimulus to support consumption, while still retaining surplus projections.
- Treasury has trimmed 18/19 growth from 3% at Budget time to 2¾%, ½ ppt shy of the RBA’s November SoMP forecast. Rather than forecast the economy to soften in 19/20, Treasury’s kept its Budget-time forecast of 3% from 19/20 onward, despite a marked downgrade to dwelling investment in 19/20. This year’s downgrade comes from lower consumption (now 2¾% from 3%, though back to 3% in 19/20), and drought-constrained exports.
- Since the Budget, policy changes have worsened the 18/19 UCB by 1.9bn, lessening the improvement from “Parameter and other variations” (the economy) that’s delivered a 11.2bn improvement.
- Revenue projections remain sensitive not only to the economy, but the terms of trade. MYEFO assumes met coal prices will be $120/t by September 19. They are currently $226/t. Should prices persist for another half year, that would add $1bn to 2019/20 revenue.
There are more interesting graphs in the enclosed pack.