MYEFO – a Tyche spot?

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Our fearful Treasurer delivered the 2011-12 MYEFO (Mid Year Economic and Fiscal Outlook) today, and as expected the Treasury forecast the long-promised return to surplus in 2012-13. The forecast is now for a statistically insignificant rounding error 1.5bn surplus for 2012-13.

I doubt it. To begin with, their growth numbers are too high: they have global growth ~3.5%y/y. It’ll be lucky to be above 2%. Once you mark that section to market it’s a deficit for sure. In this scenario, the terms of trade are likely to be materially lower – and MYEFO sensitivity analysis suggests that each 4ppt decline in the terms of trade trims 6.6bn from the bottom line in 2012-13.

The rhetoric surrounding the budget is one of tightening up, and some tightening has been done, however it’s not what it first seems. There has been a fair amount of ‘bring forward’ of 2012-13 spending into 2011-12 – so that 2012-13 can be fattened up for the election in 2013. If they miss in 2012-13, the ALP will get hammered with ‘never had a surplus’ for a generation (the most recent ALP surplus was 1.5% of GDP in 1989-90).

This window-dressing has generated an unusual zig-zag pattern in spending growth.

It follows that the ‘blowout’ in the 2011-12 deficit was partly a matter of choice. They chose to ‘kitchen sink’ the 2011-12 budget, to make it easier to attain the 2012-13 surplus to which they have tied their political fortunes. But if things weaken, expect the focus to be on how bad Europe is – like in 2008, they’ll pin the tail on the rest of the world (and fair enough).

Thus, policy decisions as well as parameter variations have added to the deficit in 2011-12 (as you can see above); and after this, policy changes help combat the parameter weakness in 2012-13 … but it’s not a proper baseline.

I prefer my chart (above): it more clearly shows the dollar change in the value of reciepts and payments between the May 2011-12 Budget to today’s MYEFO. On this chart you can clearly see the spike in payments in 11-12 and the consequent drop in payments in 2012-13. Hey that’s not a fudge — it’s Government’s privlidge.

If you have a keen eye, you may also be able to see that payments are actually higher in the MYEFO than in the 2011-12 Budget. That’s because they’ve added some stuff in.

Over the four years the budget covers, forecast reciepts amount to ~1,524bn (down ~9bn from the 2011-12 Budget) and payments amount to ~1,541bn (up ~11bn on the 2011-12 Budget).

Subtracting the (oddly) higher future fund earnings estimate (~1bn), we arrive at ~21bn of extra debt across the forward estimates. The softeing is distributed: ~14bn of extra debt in 2011-12, ~2bn in both 2012-13 and 2013-14, and ~3bn in 2014-15.

The interesting thing about the budget is that the Government didn’t try very hard to pressure the RBA into cutting agressively. The softening of the global outlook is probably sufficient to get a cut in Dec in any case, so they didn’t have to try. The absence of either a materially weaker growth forecast in the MYEFO, or a much more agressive fiscal tightening, means that the Government gave up the opportunity to press for a 50bps cut.

Never say never – it’s ceratinly possible if Europe blows up – however just now, i’d think that the RBA is merely going to give the market -25bps to 4.25% next week, and that they’ll explain it as moving the cash rate back to neutral. Save the Eurogeddon story for next year, when they may need to explain larger moves.

Treasury needed to keep the growth assumption up to maintain the surplus forecast – however i also suspect the ‘official family’ remains modestly optimistic about the outlook.

I’ll be surprised if decoupling is true this time … fool me can’t get fooled again.


  1. it is taking out 0.5 % of GDP growth whereas with the previous Government they added to GDP by 0.8%.
    This is all about politics not economics. A normal person would allow the budget to deteriorate via automatic stabilisers etc but they believe to produce a balanced budget ( a surplus is greater than 1% of GDP) is essential before the next election with lower interest rates via the RBA.

    risky and silly

  2. If this is not the time to try balancing your budget in Australia, then it will never be. I think the Treasurer is trying to do the right thing but I agree he is a bit too optimistic.

  3. Trying to balance the budget when the economy is weakening merely imports the European disease.
    You impose Austerity when the economy is doing well as Keynes said. This is clearly what we were doing.

    This is risky now as it may weaken the economy more than anticipated. We are in the midst of the fastest contraction of public expenditure we have seen.That was assumed on a commodity price boom greater than that pre-GFC.As yet it hasn’t happened. Without that you will merely introduce a recession.
    Martin Parkinson has been proven correct.

    You allow the automatic stabilisers to do their job along with the RBA being the main player alah Keynes.
    However just remember if credit markets freeze ( because of Europe) even a cash rate of 0.5% is of academic interest only.

    1. The commodity boom will still support our economy in 2012. As I said, there’s always reasons not to shrink the public debt and that is what created the current EU mess. Wasted money (see baby bonus and other). Spend, spend, spend money that you do not have. It could not be easier. For a politician is always easier to spend rather than cut. The Treasurer is being responsible this time.

  4. okay I will put it another way.if Swanny had the revenues Costello had then he would be rolling in surpluses.

    You seem not to understand. you can only cut structural items. this materially affects cyclical items which are the biggest items in the budget.
    if you cut when the economy is weakening you simply weaken it more.
    The IMF has shown this conclusively..

    If it were not so Europe would be having strong growth not falling into a recession.

    Martin Parkinson said after the budget if it were any tighter Australia would enter a recession.

    He was right!

    1. disagree – economy is strong enough now in Australia for govt to aim to a balanced budget. Forget Costello times, they won’t come back. Now it is as good as it will get for a few years. Better to save govt deficits for later, when / if China really takes a pause.

  5. Nice one. That’s a really interesting / well written piece…thanks for putting it together :)

  6. err if you were right the economy would not be weakening and the budget would be improving !

    you will NOT improve the budget position by further weakening the economy indeed you will do the reverse as the IMF shows

  7. “if you were right the economy would not be weakening and the budget would be improving”

    Where do you see all this major economic weakness all of the sudden? It was just 3 months ago most most commentators were still talking about several rate increases to fight inflation that was out of control. The economy was not that strong then, it’s not that weak now. The budget got worse because it was far too optimistic, and it it still is too optimistic now. That does not mean however that you should not try to balance (they won’t succeed) and save your ammunition for later, if needed. Did you see the capex report yesterday with investment intentions for 2012? If the RBA cuts again a couple of times and the AUD does depreciate a bit more, I think the economy will be back on track, not too soft, not too strong.

    The high AUD is being underestimated by many, and that’s the real risk to our economy. If it keeps above parity for too long, it’s going to have a MAJOR impact. In my opinion is just not sustainable and coupled with 2-3% inflation, it makes Australia one of the most expensive countries in the world, where only mining is suitable.


    1. I think so long as sovereign risk is the investment theme, the australian dollar will trade expensive. I suspect the monetary mix will be a higher AUD and lower rates in years to come.

      Sent from my iPad

      1. Yes, I agree. A high AUD will tame inflation significantly, and not only on imported goods. It will be a very significant drag on the whole economy for a while. As I said, it is making Australia one of the most expensive countries in the world. I recently had visitors from Europe who could not grasp how expensive everything is here now, at this exchange rate. A high AUD also makes the household debt more difficult to repay in the long run.

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