Australian Budget 2013-14: it’s mostly structural

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 …

budgetUCB

 

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

nomGDP

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%.

RevGrowth

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.

revGrowLT

That would have been pretty good any time over the past 40yrs … I never thought this was reasonable. Few could have.

ExpGrowth

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).

Advertisements
This entry was posted in AUD, economics and tagged , . Bookmark the permalink.

4 Responses to Australian Budget 2013-14: it’s mostly structural

  1. nottrampis says:

    I agree with CBA.
    ‘The Government deserves credit for folding on its immediate surplus commitment and taking the political heat that decision entailed. By letting the economy drive the revenue side of the Budget we have avoided the worst excesses of Eurozone‑style fiscal austerity. And by slowing the progress back towards Budget surplus we have avoided the risk of going over our very own “fiscal cliff”. The Budget forecasts from last year proposed a reduction in the underlying budget deficit of 3% of GDP in 2012/13 (the US fiscal cliff that preoccupied financial markets for much of 2012 was only slightly larger at 3¼% of GDP). The turnaround in the budget position during the current financial year is now a more manageable 1.6% of GDP. And the further reductions of ¼‑½% projected for the next few years look manageable from an economic growth perspective.’

    This Government has had lower tax revenues than the previous government.
    moreover it is very hard to estimate structural deterioration in tax.

    Only a madman would impose further austerity ( ie detracting from Growth) when nominal GDP is so weak.

  2. Pingback: Budget 2013-14: terms of trade forecasts are imprudent | ricardian ambivalence

  3. David Parker says:

    Hi,

    I am David, a financial writer. I write on several Financial topic like debt, loans, insurance, investment and so on.
    I came across your domain “ricardianambivalence.com” while searching in Google and enjoyed reading some of your articles. I just want to know do you allow outside article contribution? I would like to write for your blog on some relevant topics that is yet to cover on your blog. I will make sure that my articles will be completely unique and free to serve the purpose of your website. I do believe your readers will enjoy reading it. It will be a thrilling experience for me if my article finds a place in your blog.

    I’m waiting for a confirmation from your end.

    Thanks & regards
    David Parker

please comment

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s