What to Watch Beyond Tax Cuts in Australia's Vote-Chasing Budget

(Bloomberg) -- With an election looming, Australian Treasurer Scott Morrison will be firmly fixed on the next 12 months as a revenue windfall creates room for tax relief in Tuesday’s budget. For those with a stake in the economy’s longer-term fortunes, the devil will be in the details.

Officials will try to forecast Australia’s economic growth and employment for the coming two years as they reconcile the government’s books and create a path for tax cuts. For the following two years, they’ll rely on averages to provide projections -- and in a low-inflation period, that can throw up some ambitious targets.

Here’s what to expect in the headline numbers for the fiscal year through June 2019, according to the median estimate of economists surveyed by Bloomberg:

Cash Balance
A$ Bln

Cash Balance
% of GDP

Net Debt
% of GDP


Further out, the following three projections will be worthy of a closer look when the budget is released at 7:30 p.m. local time in Canberra.

1. The Phantom Pay Rise

Despite a long period of stagnation -- wages grew an average 2.2 percent in the past four years -- Treasury in last year’s budget forecast them rising 3 percent in fiscal 2019, a level unseen since the late mining boom. That optimism stretched out to 3.5 percent in 2020 and 3.75 percent the year after.

It was a heroic assumption. In December, the estimates were slightly downgraded following months of criticism from economists and the opposition Labor party. Still, the revised 3.5 percent forecast for fiscal 2021 remains significantly higher than the current rate of 2.1 percent.

2. The Slippery Surplus

The good news has been well-flagged: there’s an unexpected revenue windfall thanks to higher commodity prices fueling company profits and a blockbuster 2017 jobs market. Most analysts reckon the boost is good for this fiscal year and next. In fact, Morrison is expected to announce Tuesday a surplus of A$5 billion in 2019-20, balancing the books a year earlier than previously forecast, Sky News reported.

The government’s decision to opt for tax cuts over erasing the deficit as early as possible is understandable -- if it loses the election, the opposition gets to blow the spoils. There’s also a strong economic argument given households are pressed between high debt and weak wage growth, and tax relief would provide some support to consumption.

But take a broader look: Australia’s budget position is actually the worst among nations carrying a AAA rating from all three agencies. So if there’s a shock, or the revenue upswing quickly dissipates, the thin surplus is gone and the country’s fiscal credibility is likely to be called into question again.

3. The Mysterious Money

The budget’s so-called contingency reserve may get more attention than usual this year. It’s an accounting device that allows for upward revisions to the cost of government programs. But it also allows for “decisions taken but not yet announced by the government,” according to the Commonwealth Bank of Australia, meaning it could well be set up as a fund for election promises ahead of a ballot that must be called within the next year.

©2018 Bloomberg L.P.

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