Download - Budget Preview 2012-13
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7/28/2019 Budget Preview 2012-13
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18 APRIL 2013
CONTRIBUTORS
Warren Hogan
Chief Economist
+61 2 9227 [email protected]
Katie DeanHead of Australian
Economics, IIB
+61 3 8655 [email protected]
Cherelle Murphy
Senior Economist
+61 2 6198 [email protected]
Tony MorrissHead of Interest Rates
Strategy
+61 2 9226 6757Tony. [email protected]
Zo McHughInterest Rate Strategist
+61 2 9227 [email protected]
AUSTRALIAN ECONOMIC UPDATE
AUSTRALIAN ECONOMICS
ANZ RESEARCH
AUSTRALIAN BUDGET 2013-14 PREVIEW IN DEFICIT FOR LONGER
ANZ forecasts the Commonwealth budget to bein deficit by aroundAUD17bn in 2012-13 and around AUD7bn in 2013-14 when it isreleased at
7:30pm AEST on May 14.These deficits are small relative to GDP at around 1%
and % respectively but do represent a deterioration from the small surpluses
projected in the October mid-year update.
Small budget deficits are expected until 2014-15. The return to surplusthat may occur in 2015-16 will require a modest further tightening of fiscal
policy supporting the view that expansionary monetary policy will remainappropriate for some time. An earlier return to surplus is very difficult without a
notable tightening of discretionary fiscal policy or an AUD decline that outpaces
the decline in commodity prices. This is not ANZs expectation, however, as we
see the AUD remaining elevated for some time.
Net debt is expected to rise only slightly, to a peak of around AUD176bnor an average of around 10.5% of GDP over the coming four years. Further
increases in net debt from budget deficits will be partially offset by a low interest
burden on this debt, in line with continued low global interest rates.
Whilst disappointing, these weaker budget outcomes should not affectAustralias coveted AAA (stable) credit rating. The Government and
Opposition are both committed to conservative fiscal policy
1
. The budget balanceis likely to continue to improve and debt levels are low by international standards
ensuring the Government retains budget flexibility to react to negative shocks. If
there were a change in the Governments fiscal strategy to achieve budget
surpluses on average over the medium-term, this would not be looked upon
favourably by rating agencies. This, however, is unlikely.
There are three principles by which we will judge the 2013-14 budget:First, is this an appropriate fiscal setting for the current economic cycle?
A further modest tightening of fiscal policy is arguably not inappropriate if
Australia is near a peak in the unemployment rate (ie. nearing the beginning of a
cyclical non-mining upturn). Fiscal contraction is less appropriate if the labour
market outlook worsens and/or downside risks to the non-mining economy rise.
Second, do the fiscal settings presented provide a credible path back tobalance, and thus Australian fiscal sustainability? The weaker budget
outcome this year due to the falling terms of trade and high AUD suggests some
structural vulnerability in the budget. Just as the broader economy needs to
adjust to a lower terms of trade and a higher AUD, so too does the Government
sector. A broadening of the revenue base and/or a reprioritisation of expenditure
is required. A Government announcement to deliver the required reforms during
an election year would be a welcome surprise.
Third, does the budget support long-term structural reform to liftproductivity growth?
1The Coalition is, however, yet to release its full suite of policies, with fewspecifics expected until the August release of the Pre-Election Economic and
Fiscal Outlook.
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A BUDGET DEFICIT IN EXCESS OF 1% OF GDP IN 2012-13
The Commonwealths budget position is not improving as quickly as anticipated when
the October Mid-Year Economic and Fiscal Outlook (MYEFO) was released last year.Monthly Commonwealth financial statements suggest the underlying cash balance
was a deficit of around AUD24bn in the eight months to February 2013. This is
running behind where it should be in order to meet the projection of a AUD1.1bn
surplus for the 2012-13 fiscal year (Figure 1). The Government said in December that
this surplus would not be achieved.
FIGURE 1. UNDERLYING CASH BALANCE
-60
-50
-40
-30
-20
-10
0
10
20
Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun
AUDbn
2007-08 2008-09 2009-10 2010-11 2011-12 2012-13
MYEFO est. 2012/13
AUD1.1bn
Sources: Minister for Finance and Deregulation and ANZ
The February Commonwealth Financial Statements suggest the deterioration
in the budget balance, relative to the MYEFO forecasts, is due almost entirely
to weaker revenue growth. The statement reports that, yearto-date:
- Revenues are currently running around 3% below MYEFO projections; and,- Expenses are a little below MYEFO expectations (i.e. better than), by around
0.3%.
Holding these relativities constant, produces an underlying cash balance estimate for
2012-13 of around AUD13bn (0.8% of GDP). 2
This, however, appears a little too optimistic when we consider how revenues andexpenses are tracking relative to 2011-12, particularly on the expenses side.
- Revenues are currently 7.2% above 2011-12 levels (year-to-date). This isbelow the 10.5% increase in revenues projected for 2012-13 in the MYEFO.
2The underlying cash balance is equal to receipts less payments less FutureFund earnings. Our workings throughout this note assume no change in Future
Fund earnings relative to the MYEFO forecasts. At MYEFO, the sale of spectrum
was expected to boost Government receipts by around AUD4bn in 2012-13.
We now expect weaker market conditions will reduce these receipts, while
some of the payments from telecommunications companies have also
reportedly been deferred until 2013-14.
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- Expenses are currently 2.2% above 2011-12 levels (year-to-date). This iswell above the 0.7% decline in expenses that was projected for 2012-13 as a
whole at MYEFO.
Assuming these relativities hold for the rest of this fiscal year produces a budget
deficit estimate of AUD28bn (1.9% of GDP) for 2012-133.
Accurately forecasting a budget outcome is fraught with difficulty given the potential
for the Government to shift the timings of payments and receipts to suit political and
other motives. The natural vagaries of the profit and economic cycles can also push
these figures around.
Taking a mid-case scenario, our assumptions for 2012-13 are:
- Receipts are 4% weaker than MYEFO. This is broadly in line with current YTDtracking relative to MYEFO, but allows for further impacts of a higher AUD
relative to MYEFO. Whilst it assumes around a 45% uplift in revenues for the
rest of this financial year, this is not atypical given April is one of the biggestmonths for tax collections.
- Payments fall as expected at MYEFO (-2.1% from 2011-12).Adjusting for the Future Fund earnings and the adjusted timing and revenue
from the sale of spectrum, these assumptions imply a budget deficit of
around AUD16.6bn (1.1% of GDP) for 2012-13 (Figure 2).
FIGURE 2. UNDERLYING CASH BALANCE, MYEFO VS ANZ FORECAST
-5
-4
-3
-2
-1
0
1
2
3
4
60 64 68 72 76 80 84 88 92 96 00 04 08 12 16
%o
fGDP
MYEFO forecast ANZ forecast
forecast
Sources: MYEFO and ANZ
Of course, there are the usual caveats around this forecast, with numerous
upside and downside risks. On the upside (i.e. assisting a smaller deficit), revenue
could be boosted by, amongst other things, an uptick in mining tax receipts in H1
2013 following the improvement in iron ore prices in Q4 2012, whilst expenses could
be constrained by additional discretionary spending cuts.
We see the balance of risks causing a larger deficit. These risks include (a) failure of
company tax revenues to match the usual seasonal pick up in April (when around
17% of payments are collected) because of ongoing pressure on profits from the
3 Note, this simple working makes an adjustment for expected earnings from
the Future Fund and for the sale of spectrum2.
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higher AUD and the possibility of lower commodity prices, among other factors4; (b)
the temptation to implement new spending, which is not fully offset ahead of the
election period; (c) a further rise in the unemployment rate (the MYEFO forecasts are
based on a stable unemployment rate of 5% in the June quarter compared to a
5.6% rate in March); and, (d) one-off spending pressures e.g. natural disaster
funding and greater-than-expected asylum seeker arrivals.
SIGNIFICANT CONTRACTIONARY FISCAL POLICY WOULD BE REQUIRED FOR
A RETURN TO SURPLUS IN 2013-14
Returning the budget to surplus over the next couple of years now looks more difficult
without very strong economic growth forecasts (unlikely) or an explicit tightening of
fiscal policy (new revenue measures and/or very significant savings). Two major new
policies, the National Disability Insurance Scheme and the Gonski Education reforms,
which are expected to cost several billion dollars each per annum and are expected to
be funded out of new savings, further challenge the speed at which the budget deficit
can be reduced. The Prime Minister announced at the weekend that the education
reforms, as they stand, would cost AUD9.4bn over the next six years and only
AUD520m of that (over four years) has been offset so far by associated spending
cuts.
The expected deterioration in the budget balance in 2012-13 considerably
worsens the starting point for the budget in 2013-14. This is because tax
receipts lag nominal GDP growth5. Scenario analysis in the MYEFO showed that a 1%
reduction in nominal GDP growth in 2012-13 that was driven by a weaker terms of
trade would reduce the underlying cash balance by AUD2.8bn in 2012-13 and
AUD6.7bn in 2013-14. Comparing ANZs nominal GDP growth forecasts with those
printed at MYEFO for 2012-13 (Figure 3) suggests the starting point for the 2013-14
underlying cash balance is already AUD8.4bn lower. Admittedly, this may be an over-estimate of the hit to the budget because not all of the current weakness in revenues
reflects a weaker terms of trade; some of it is also due to lower real GDP growth.
FIGURE 3. PARAMETER FORECASTS, ANZ VS MYEFO
MYEFO ANZ MYEFO ANZ
Nominal GDP 4.0 2.8 5 4.9Real GDP 3.0 2.8 3.0 2.9
Terms of trade -8.0 -10.0 -2 -0.5Unemployment rate 5 5.7 5 5.7CPI 3.0 2.9 2 2.1
Wage price index 3 3.2 3 3.5Exchange rate TWI 75 78 75 79
Exchange rate AUD/USD 1.02 1.04 1.02 1.05Unemployment rate is for the June quarterCPI and wages are through-the-year growth to the June quarter
Exchange rates are year averages
2013-142012-13
Sources: ABS, MYEFO and ANZ
A more useful way to consider the likely budget position in 2013-14 and
beyond is to consider the expected balance under different revenue and
4At MYEF0, the exchange rate was assumed to be a trade weighted index ofaround 75 and AUDUSD around 1.02, compared to averages of 77.6 and 1.039
respectively in 2012-13 to date.
5 This is because company tax instalment rates for Year 1 do not tend to be
adjusted until after a company has lodged its tax return for Year 1, which is
typically not done until six months after the end of Year 1.
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expense growth scenarios. This provides a more meaningful top down analysis of
how fiscal policy needs to respond to the new reality of lower nominal GDP growth.
Below we outline the underlying cash balance for the forward estimates period basedon three different scenarios for expenses and revenues growth (Figure 4). We
consider scenarios that would be consistent with (a) very tight fiscal policy; (b)
moderately conservative fiscal policy; and, (c) explicit fiscal policy slippage
(Figure 5).
FIGURE 4. UNDERLYING CASH BALANCE (AUDBN) THREE SCENARIOS
SCENARIO 1 SCENARIO 2 SCENARIO 3 MYEFO
TIGHT FISCAL POLICY CONSERVATIVE LOOSE FORECASTS
2012-13 -16.6 1.1
2013-14 4.0 -6.8 -14.0 2.2
2014-15 19.0 -3.6 -18.8 3.32015-16 37.8 2.1 -21.9 6.4
Source: ANZ
FIGURE 5. SCENARIOS FOR REVENUE AND EXPENSE GROWTHSCENARIO 1 SCENARIO 2 SCENARIO 3 13-14 to 15-16 MYEFO
TIGHT POLICY CONSERVATIVE LOOSE AVERAGE FORECASTSREVENUE (% ch) 7.5 6.0 5.5 5.8EXPENSES (% ch) 3.0 4.5 6.0 5.4 Source: ANZ
We expect the Governments most likely course of action will be along the lines of
Scenario 2. That is, the Government will limit expenses growth in order to
present the budget returning to surplus at the end of its forward estimates
period.
This scenario analysis demonstrates that a return to surplus in the forward estimates
period is not possible unless either (a) revenue growth significantly outpaces nominal
GDP growth (unlikely without new revenue measures being put in place); or, (b)
expenses growth is limited to 1.5%-2% per annum in real terms. The latter (which
we assume will be the Governments course of action) means a slightly
tighter fiscal policy than the Governments previous policy settings.
Previously, the Government had committed to cap real expenses growth to 2% pa
over the cycle, but in the three years 2013-14 to 2015-16, had only planned to keep
expense growth to this low level in the middle year, 2014-15.
STARTING POINT IS CRUCIAL
Scenario analysis also highlights how crucial the starting point for this
budget cycle is to the possibility of being able to report a surplus. This is due
to the lags involved in revenue collection. If our forecasts for the 2012-13 underlying
cash balance (-AUD16.6bn) prove to be too optimistic, the path back to surplus will
take longer than four years unless there is a very notable tightening of discretionary
fiscal policy.
Figure 6 below applies our scenarios to a more pessimistic 2012-13
underlying cash deficit of AUD20bn. It shows that a return to surplus by
2015-16 is not possible under our middle or conservative fiscal policy
framework.
We would emphasise however that a return to surplus by a certain point in
time has never been an economic imperative as much as a political one. First,
the difficulty of forecasting means the Governments forecasts beyond the current
year often prove to be some way out. Second, a plan for an improvement in the
budget position and a return to surplus over the medium term is all we would like to
see for fiscal settings to be appropriate in the current setting. The differencebetween a 0.1% of GDP surplus and 0.1% of GDP deficit is almost nil in
terms of its impact on the economy.
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Deficits of up to AUD7bn are less than % of GDP. Third, the composition of the
surplus matters more than the size. For example, if spending is stripped from the
foreign aid budget to achieve surplus forecasts, this will have low multiplier effects on
the economy and a vastly different impact than if the surplus is achieved by cutting
welfare benefits (which have a high multiplier effect on the economy).
FIGURE 6. UNDERLYING CASH BALANCE (AUDBN) WEAKER STARTING POINTSCENARIO 1 SCENARIO 2 SCENARIO 3 MYEFO
TIGHT FISCAL POLICY CONSERVATIVE LOOSE FORECASTS
2012-13 -20.2 1.12013-14 0.2 -10.6 -17.8 2.22014-15 15.1 -7.6 -22.9 3.32015-16 33.8 -2.0 -26.2 6.4
Source: ANZ
STRUCTURAL REFORM NEEDED
Importantly, most of the deterioration in the budget position reflects a weaker
economy, rather than an explicit loosening of fiscal policy. This is because thedeterioration largely reflects weaker revenue growth (due to weaker profits growth,
not policy changes) and not stronger-than-expected expenditure growth.
Nevertheless, the failure of the budget to recover as quickly as the Government
anticipated highlights more than just cyclical weakness. The scenario analysis
presented above, which demonstrates the fiscal constraint required for a
return to surplus, reveals the structural weakness of the budget.
The ability of the budget to grow its way out of deficit (i.e. for revenues to recover
sufficiently from an upturn in the economic cycle to drive the return to surplus) has
been constrained by a weakening in the terms of trade to, arguably, a more normal
level and compounded by the enduring strength of the AUD.
Figure 7 below illustrates the extent to which the current projections, which feature ahigher terms of trade, drive the projected return to surplus. The 2012-13 terms of
trade forecast is represented by the pink dotted line, which is well above the dark
blue actual path of the terms of trade. Figure 8 meanwhile illustrates the still very
large gap between revenues and expenses. It shows how slowly revenues are
recovering, and hence the pressure on expenditures to weaken to close the gap. It
also shows the step down in receipts (as a share of GDP) that have occurred given
nominal GDP growth is normalising as the terms of trade normalises.
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FIGURE 7: TERMS OF TRADE ACTUAL VS GOVERNMENT FORECASTS
40
50
60
70
80
90
100
110
120
90 93 95 98 01 04 06 09 12 14
Terms of t rade with ANZ Forec ast 2004- 052005-06 2006-072007-08 2008-092009-10 2010-112011-12 2012-13
Inde
forecast
Sources: ABS, ANZ and Commonwealth Treasury
FIGURE 8: RECEIPTS VS PAYMENTS
18
19
20
21
22
23
2425
26
27
28
71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15
%o
fGDP
Receipts - ANZ forecast Receipts - MYEFO forecast
Payments - ANZ forecast Payments - MYEFO forecast
forecast
Sources: MYEFO 2012-13 and ANZ
This is also demonstrated by Figure 9 (below) which shows the weakening of the
Governments tax receipts, relative to the economy. This followed the income
tax cuts in the last half of the previous decade when the terms of trade boom
commenced.
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FIGURE 9: NOMINAL GDP GROWTH VS NET TAX COLLECTIONS
Sources: ATO, MYEFO 2012-13 and ANZ
This analysis does not suggest the Australian budget is seriously structurally
impaired. Nevertheless, just as the broader economy needs to adjust to a
lower terms of trade and a higher AUD, so too does the government sector.
This will require more than just a promise to cap expenditure growth until the budget
returns to balance, especially given the coincident impact on expenditure as the
population ages.
It is also worth highlighting that demographic developments will mean expenditure
pressures are higher (e.g. in aged care) and revenues are likely to grow more slowly
(as there are fewer people paying taxes). Figure 10 below shows that the population
over 65 (traditionally the older end of the non-working age population) will grow by
around 140% over the next forty years, while the working age population will grow
by only around 40%. Health spending is also likely to continue to weigh on the
budget for these reasons as medical technology continues to advance. These
projections have been well-documented in recent Intergenerational Reports from the
Government and other sources6.
6We believe the planned 2013 edition of the Intergenerational Report has been put on hold. The
new Parliamentary Budget Office is expected to outline the structural budget position by June30, which may spark debate on the issue and how the structural deficit can be addressed.
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FIGURE 10: ANZS PROJECTIONS OF POPULATION AGE COHORTS
0
5
10
15
20
25
1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
65+
Working age (15-64)0-14
Totalpopulation(millions)
Forecasts
140%
40%
34%
Sources: ABS and ANZ
A modest broadening of the revenue base and/or a reprioritisation of spending is
therefore likely to be required for a number of reasons. The Government has tackled
some of its medium-term expenditure pressures in recent years, for example,
reducing access to the private health insurance rebate by means-testing it, reforming
the Pharmaceutical Benefits Scheme and most recently by reducing tax concessions
for high income superannuation recipients. But more change of this nature is required
to counter medium-term fiscal pressures. A Government announcement to deliveranother slab of the required reforms during an election year would be a welcome
surprise.
NET DEBT TO RISE TO AROUND 11% OF GDP
The expected deterioration in the budget relative to the last update in October 2012
means Australias net debt position is now likely to peak at around 11% of GDP, a
little higher than the previously estimated peak of 10% (Figure 10). Limiting the
extent of the rise in the net debt position is the continued downward pressure on
global yields, which is likely to reduce the average interest rate paid on Australian
debt, at least in the short term. Indeed, we would highlight this as the main risk to
our projections.
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FIGURE 11. GENERAL GOVERNMENT NET DEBT
-5
0
5
10
15
20
1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016
%o
fGDP
2012-13 MYEFO2013-14 Budget - ANZ projections
2013-14 Budget - ANZ projections optimisic scenario
2013-14 Budget - ANZ projections pessimistic scenario
forecasts
Source: Commonwealth Treasury and ANZ
Despite this likely slight increase in Australias net debt position, this measure of
external vulnerability remains low by global standards (Figure 12).
FIGURE 12. GENERAL GOVERNMENT NET DEBT INTERNATIONAL COMPARISON
0
10
20
30
40
50
60
70
80
90
100
Australia Advanced
economies
Emerging
economies
G-20 Advanc ed G-20 Emerging
Average
%o
fGDP
2011 2012 2013 2014
Sources: IMF and ANZ
IMPLICATIONS FOR BOND MARKETS
The deterioration in the budget position will require greater issuance of
Commonwealth Government Securities (CGS) over coming years compared with the
budget update in October last year. The numbers are not large and will not bring the
AUD300bn debt ceiling into play based on the current outlook. Our new projection for
Commonwealth bonds on issue is below in Figure 13.
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FIGURE 13. COMMONWEALTH GOVERNMENT SECURITIES ON ISSUE
0
50
100
150
200
250
300
350
95 97 99 01 03 05 07 09 11 13 15 17 19
AUDbn
Total Securities on Issue (AUD'000 M)
Debt Ceiling
Total CGS projected in October2012
Total CGS with projected deficit
Sources: AOFM and ANZ
This projection may trigger some cautionary headlines from rating agencies on the
apparent slippage in budget discipline over the out years. As argued above, this is not
related to a blowout in expenses but rather exogenous factors constraining revenue
growth. The general sovereign debt metrics remain very strong as can be seen by the
comparison of net debt to GDP relative to other major economies. Australias public
sector net debt position needs to be better than its high rated peers, however, given
the rating agencies continued concerns about Australias current account and
external (economy-wide) debt.
The profile means we are looking at the maintenance of a deep and liquid CGS
market over the medium-term. This should ensure ongoing investor interest in CGS,
which continue to offer the highest yields for a AAA (stable) rated market.
The Australian Office of Financial Management (AOFM) should easily manage the
increased call on markets. We would expect to see a continued focus on raising the
extra funds via longer-dated issuance considering investor demand for high quality
sovereign bonds and historically low global interest rates that are a function of
extraordinary policy settings in the developed world. In reported comments this
week, Opposition Treasury spokesman Joe Hockey said the party would issue bonds
with a duration of 40-50 years if the party were to win Government7.
We will also be interested in any new developments around the financing of
infrastructure investment via CGS in the budget. The current low level of interest
rates and numerous calls for infrastructure improvement in Australia would suggest
there is ample opportunity for the Commonwealth to work with the states on this
issue. Of course, the productivity gains that may come from infrastructure investment
would have to be balanced against increased indebtedness (and managed within
limits that would maintain the AAA rating). The Opposition has said it will ask the
AOFM to examine an Infrastructure Partnership Bonds scheme to lift private
investment should they win Government in September.
7Hockey proposes bonds up to 50 years,Australian Financial Review, 11 April2013, p11.
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