Australia is seen continuing its economic winning streak in Federal Treasurer Scott Morrison’s second budget, which makes some courageous assumptions on wages and economic growth to deliver a promised surplus by 2021.
However, with the center-right Coalition government lagging its main rival Labor party in the polls, Morrison will be hoping that the politically astute budget announced Tuesday wins more friends than enemies with its infrastructure boost, corporate tax cuts, and welfare handouts offsetting higher taxes on workers and students along with a slug on the major banks and foreign property investors.
As a result, the federal budget deficit is seen shrinking from A$37.6 billion (US$27.6 billion) in fiscal 2017, or 2.1 percent of gross domestic product (GDP), to A$29 billion next year and A$21 billion in fiscal 2019, with a modest A$7 billion surplus projected by fiscal 2021. Meanwhile, net government debt is seen peaking at A$375 billion, or 19.8 percent of GDP, in fiscal 2019, before declining to a projected 8.5 percent of GDP by fiscal 2028.
Having already broken the Dutch record of 103 straight quarters of economic expansion, Australia is expected to stretch its winning run even further by posting a forecast GDP gain of 2.75 percent in fiscal 2018, rising to 3 percent thereafter. This will be aided by an expected improvement in non-mining business investment and household consumption in the world’s 12th largest economy, while the global economy is also seen picking up speed, including the United States and China.
However, like Japanese Prime Minister Shinzo Abe, the conservative government is pinning its hopes on a surge in wages growth, albeit with forecasts that would make Abe blush. Wages growth is expected to accelerate from 2 percent in fiscal 2017 to 3 percent by fiscal 2019, 3.5 percent the following year, and 3.75 percent by 2021, despite its recent lackluster trend.
As noted by Bloomberg News, even economies like the United States and Britain that are at or near full employment still face sluggish wages growth, while Japan’s rising job vacancies have yet to produce large rises in salaries. Australia’s jobless rate is seen shrinking from 5.75 percent in fiscal 2017 to 5.25 percent by 2021 – barely above its “full employment” level of 5 percent – yet wages are still expected to climb.
“Oh for the days when conservative[s] railed against strong wages growth; now we have a conservative treasurer desperate for wages to grow fast,” commented The Guardian’s Greg Jericho.
Along with higher wages, the budget is counting on higher income tax revenues to achieve the promised deficit reduction. By fiscal 2021, personal income tax will account for more than 51 percent of all taxation revenue, compared to 18 percent from company tax, with government revenue reaching around a quarter of GDP.
Winners and Losers
Morrison described the budget as “based on the principles of fairness, security, and opportunity.”
“We are choosing to ensure the government lives within its means, taking practical action to reduce the deficit and the growth in our debt, and doing all we can to preserve our AAA credit rating, whilst pursuing policies to grow the economy,” he said in a statement.
However, like any annual federal budget, there was a long list of winners and losers, with many of the latter unable to vote on the measures.
Among the winners were infrastructure projects, with A$10 billion allocated to a national rail program and A$5.3 billion toward building a second Sydney airport. The government also promised A$18.6 billion in extra schools funding along with extra funds for healthcare and the National Disability Insurance Scheme (NDIS), while aiding small businesses and committing to pursue a 25 percent tax rate for all companies.
The losers, though, included regular workers, with a higher Medicare levy to help fund the NDIS boost, while students were hit with higher tuition fees and the major banks were slugged with a A$6.2 billion levy, among other penalties.
Foreign property investors were also hit with tougher rules amid concerns over a housing boom in Sydney and Melbourne, with a “ghost tax” of at least A$5,000 a year on those failing to “occupy or lease a property for at least six months of every year.”
In foreign policy, defense spending was projected to rise by 5.3 percent a year through to fiscal 2021, reaching nearly A$34 billion. Foreign aid, though, was cut to its lowest level in the nation’s history as a proportion of national income, down from its fiscal 2013 peak of A$5.6 billion to A$3.6 billion by fiscal 2021. Foreign workers were also hit, with a $1.2 billion levy on their employers to fund training for local workers.
Yet after having suffered criticism for its “unfair” budgets under former Prime Minister Tony Abbott, the Coalition’s latest budget is seen answering the demands of critics and ensuring smoother passage through a politically hostile Senate.
“This isn’t just a budget of which Labor would be proud, and the [opposition] Greens can hardly grizzle either. It taxes big, spends big, builds big, looks after the needy – and belts the banks,” the Australian Financial Review’s Phillip Coorey wrote.
For the Turnbull government’s political foes, “it does almost all they have been baying for for years,” Coorey said, while not overly penalizing government supporters.
Yet market analysts were not so forgiving, with Royal Bank of Canada’s Su-Lin Ong describing the wage forecasts as “probably on the optimistic side.”
“We continue to forecast a slower deficit consolidation than projected in the budget,” Moody’s Investors Service’s Marie Diron said in a statement.
“We assume that GDP growth will be somewhat slower than projected by the government, at 2.5 to 2.7 percent in the next few years. Productivity growth has slowed in Australia, like in other high-income economies. We estimate that this slowdown is partly related to long-lasting factors that will continue to weigh on growth.”
ANZ Research pointed to “downside risks to the revenue numbers… while on the spending side tight discipline will be required.” In particular, the Australian bank’s economists pointed to the risks of rising gross debt, which is expected to reach more than A$600 billion by fiscal 2021, reflecting increased capital expenditure.
“While the government will argue that much of this increased debt is so-called ‘good,’ in that it has been used to fund productive assets, increased leverage is not without cost or risk. In particular it increases the vulnerability of the government to a negative shock. For this reason we think the uninterrupted growth in gross debt outstanding is one of the weak links in the government’s fiscal strategy,” ANZ said.
On the government’s treasured triple-A credit rating, ANZ said “we don’t see this budget pushing any of the agencies to bring the rating lower, though the additional leverage may attract some adverse comment. Importantly, Australia’s external position has also improved, offsetting some of the fiscal slippage.”
For a budget aimed at securing “better days ahead for all Australians,” Morrison has seen little reason to threaten the interests of core constituencies, while penalizing those with a lack of voting power. And with another federal election due before the predicted surplus comes to pass in fiscal 2021, there is still plenty of time for more handouts and even more heroic forecasts to make the books balance.