The 2013-14 budget has been released, and it shows the (fairly) predictable consequences of the decline in the terms of trade. Gone are the surpluses, and in their place we have ~60bn more of deficits. That’s a lot of extra deficit, given that the MYEFO forecasts are barely six months old, and given that neither the AUD nor the terms of trade have moved by all that much in that time …
What’s worse, the budget forecasts assume only a few percentage points of further decline in the terms of trade (-0.75% in 2013-14, and -1.75% in 2014-15). If we assume that the (still) high terms of trade are cyclical, it follows that most of the budget deficit is structural.
As I noted earlier, the deficit projections are as follows:
12/13 :: -19.4bn
13/14 :: -18.0bn
14/15 :: -10.9bn
15/16 :: +0.8bn
16/17 :: +6.6bn
Much of the focus is rightly being given to the weakness of nominal GDP growth. Relative to peak forecasts, the FY13 nominal GDP forecast is ~3% lower, and the FY14 and FY15 nominal GDP forecasts are down by ~3.5%.
Now, it sure is true that this will be depressing revenues, but was it really realistic to expect ~12%y/y growth for 2012-13? It’s been a long time since that’s happened.
That would have been pretty good any time over the past 40yrs … I never thought this was reasonable. Few could have.
There has also been insufficient restraint on the expenditure side. You can see the consequences of the ‘shuffling’ that was attempted to push the budget back into surplus in 2012-13, with spending growth bouncing from -1%y/y to +6.5%y/y in 2013-14 as the government ‘breathes out’.
Even with the softening of the Australian Government’s budget position, I would now think we remain mid-pack in terms of the cyclically adjusted primary balance — as there has been a decent improvement. The great shame is that momentum is not sustained — though I suppose that’s for the Coalition to clean up.
A decline of more than a few percentage points in the terms of trade seems inevitable over the long-term (even if no one can forecast the exact timing) and ought to have been anticipated and planned for. It is appropriate that the Coalition must deal with it — they started the budget softening in 2004-5 (though the ALP has been in power for 6yrs now, so they share the blame).
The necessary fiscal adjustment will keep the pressure on the RBA to ease further over the next year or so. I would think that there will be a little more tightening at both the 2013-14 MYEFO, and the 2014-15 Budget (say 0.5ppts of GDP at each).