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Don’t fall for the spin - Scott Morrison’s budget surplus is no certainty
Prime Minister Scott Morrison could yet be guilty of prematurely declaring that his government will deliver a budget surplus in 2018-19.
Sure, tax revenue is growing at a rapid pace and the government is underspending on a range of government services, but there are still seven long months to go between now and the end of the financial year that might yet blow up the surplus commitment.
PM Morrison’s ‘return to surplus’ boast is based, it appears, on hard data for the first four months of the 2018-19 financial year on revenue and spending information from the Department of Finance. These numbers do look strong, at least in terms of the budget numbers and if the trends on revenue and spending continue, the budget will probably be in surplus. Treasury will be factoring in ongoing economic growth, no increase in the unemployment rate and buoyant iron ore and coal prices over the remainder of the financial year. These forecasts and hence the budget bottom line are subject to a good deal of uncertainty, as they are every year.
If, as is distinctly possible, the economy stalls in the March and June quarters 2019, commodity prices continue to weaken and if there are some unexpected increases in government spending, the current erroneous forecasts for revenue and spending could leave the budget in deficit.
In the wake of the September quarter national accounts, and with accumulating information on house prices, dwelling investment, the global economy and spare capacity in the labour market, I have revised my outlook for official interest rates.
For some time, I have been expecting the RBA to cut the official cash rate to 1.0 per cent, a forecast that has been wrong (clearly) given its decision to leave rates steady right through 2018.
That said, it has been a highly profitable call with the market pricing interest rate hikes when the call was made which has yielded a decent return as time has passed.
My updated profile for RBA rates is:
May 2019 – 25bp cut to 1.25% August 2019 – 25bp cut to 1.00% November 2019 – 25bp cut to 0.75%
The risk is for rates to 0.5% in very late 2019 or in 2020
It will be driven by:
Underlying inflation remaining below 2%
GDP growth around 0.25 to 0.5% per quarter in 2019
Annual wages growth stuck at 2.5% or less
Global growth slowing towards 3%
Labour market under-utilisation around 13 to 13.5%
There are likely to be other influences, but these are the main ones.
AUD, as a result, looks set to drop to 0.6000 – 0.6500 range.