Australia: Australian government presents budget aimed at spurring growth
May 12, 2015
The budget for FY 2015/2016 that Treasurer Joe Hockey presented the to the House of Representatives on 12 May is primarily aimed at middle income Australians and was seen as generally accommodative compared to last year’s budget, pushing fiscal consolidation targets into the future. The message for this year was that spending would increase in an effort to stimulate growth in the economy. The government accounts closed FY 2014/2015, which ended in March 2015, with a shortfall of 2.5% of GDP. The government expects to reduce the deficit to 2.0% of GDP by FY 2015/2016 and to further shrink the deficit to 0.2% by FY 2018/2019.
The conservative collation government seeking to win support from Australians before the next election offered a number of concessions to voters, some of which involved repealing some unpopular measures from last year’s hawkish budget issuance. The co-payment and pension indexation changes from last year were scrapped, while AUD 5.5 billion was set aside in the form of tax breaks and other incentives for small businesses and entrepreneurs, marking the headline for this year’s budget package. Enhancements were also made through an AUD 4.4 billion family support package and an AUD 1.2 billion boost in national security spending. The spending initiatives are subject to being successfully passed through the senate, however analysts predict that the crux of the budget will not be effected by political inertia.
Regarding economic growth, the government has attempted to balance fiscal consolidation with more growth-inducing measures. Improved revenues stemming from more robust growth in the longer term are expected to help repair the government balance, bringing it into positive territory by 2020. The weaker growth expected in FY 2015/2016 should be compensated by a return to stronger growth in FY 2016/2017, with government revenues increasing from 24.5% of GDP in FY 2015/2016 to 24.8% in FY 2016/2017 and reaching 25.9% by FY 2019/2020. Unemployment is expected to peak this fiscal year at 6.5%, although the government sees it gradually easing to 5.75% in FY 2018/2019 thanks to increased expansionary measures, particularly through the small business package.
The government revised downward its average annual growth forecast from 6.6% in December’s Mid-year Economic and Fiscal Outlook to 6.3% as a result of depressed iron prices and weak domestic wage growth. In the same vein, debt projections have increased modestly, however Australia’s credit rating will not be affected as ratings agencies have not seen a reason to revise the current AAA rating.
The measures in the budget attempt to maintain fiscal consolidation targets by shifting from spending cuts to revenue increases. This will compound the impact of the Reserve Bank of Australia’s May rate cut. FocusEconomics Consensus Forecast panelists have taken the budget announcement into account and now expect the fiscal deficit to be at 2.4% of GDP in 2014, which is unchanged over the previous month’s estimate. For 2015, the panel expects the deficit to narrow to 1.9% of GDP.
Author: Robert Hill, Economist