Australia Budget Deficit to Narrow Sharply, Westpac’s Evans Says

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Australia’s fiscal position has undergone an “extraordinary improvement” that reflects a faster-than-expected recovery in the labor market and household spending, and higher commodity prices, Westpac Banking Corp.’s Bill Evans said.

The budget shortfall in the year ending June 30 will be A$155 billion ($120 billion), or 7.5% of gross domestic product, compared with the government’s December forecast of A$197.7 billion, Evans, chief economist at Westpac, said in a research note Tuesday. It will narrow to A$84 billion, or 4% of GDP, in fiscal 2022, even with an expected additional A$20 billion of spending, he said.

“The budget strategy is to go for growth,” Evans said. “What drives fiscal repair is having the economy operating closer to full capacity -- with revenue boosted by a higher employment to population ratio. Spending restraint may well gain less traction – if the economy gets stuck in the slow lane.”

Treasurer Josh Frydenberg has pivoted to align his budget strategy with the Reserve Bank of Australia’s goals, saying he’s aiming to put a 4 in front of the jobless rate -- currently 5.6% -- to try to rekindle inflation. Keeping fiscal and monetary policy in sync should help push the economy toward full employment more quickly and, in turn, drive faster wage growth in the economy.

Carlos Cacho, chief economist at Jarden Securities Ltd., said the government and central bank lining up together “is a material positive for the outlook.” He expects the budget deficit will be A$153 billion in fiscal 2021, with a cumulative A$100 billion upgrade across the forecast horizon.

Evans noted the better budget position will flow through to the debt profile.

At the end of June 2022, net debt will moderate to a revised A$731 billion, or 34.5% of GDP, A$67 billion lower than the mid-year forecast of A$798.5 billion, he said. It will climb to A$856 billion, 37.6% of GDP, by June 2024, almost A$96 billion lower than the mid-year figure.

“Australia’s success as a community in dealing with the health crisis and the wave of policy support provided by the RBA and governments was central to the much better than expected outcomes,” Evans said.

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