Weekly economic briefing: The elusive Budget surplus: close…but no cigar for 2018-19

The Weekly Economic Briefing is written by two senior Deloitte Economists, David Rumbens from Deloitte Access Economics in Australia and Ian Stewart Deloitte’s Chief Economist in the UK. They provide a personal view on topical financial and economic issues. Subscribe to receive the Weekly Economic Briefing in your inbox!

Australian economic briefing
UK economic briefing
International economic briefing

Australian economic briefing by David Rumbens

This section of the briefing provides a snapshot of key economic data and issues of relevance to Australia.

The elusive Budget surplus: close…but no cigar for 2018-19

The roller coaster ride that is Federal Government revenue collections has lately been riding high. As the latest edition of ‘Deloitte Access Economics’ Budget Monitor outlines, strong global growth and favourable domestic economic conditions have seen revenue collections soar.

Company tax receipts are being buoyed by higher than expected prices for iron ore and coal. Strong employment growth is keeping personal income tax receipts rolling in, and also reducing spending on unemployment benefits. These positives for Canberra’s two largest revenue sources mean that we expect total revenues to outperform Treasury’s latest Budget forecasts by $9.2 billion in 2018 19 and $2.1 billion in 2019 20.

The revenue and (smaller) spending positives create the most favourable Budget outlook since the GFC. Based on announced government budget policies, we forecast a small deficit of $4.9 billion (-0.3% of GDP) in 2018 19, and in the following year an equally small surplus of $4.2 billion (0.2% of GDP).

This has been a long time coming. The last Budget surplus was way back in 2007 08, and while governments of both political persuasions have consistently forecast a return to surplus over the past decade, they’ve consistently been wrong (see chart below). Now – and finally – the Budget surplus projections are realistic.

Chart: Budget balance forecasts compared to actuals, % of GDP


Source: Government Budget papers; Deloitte Access Economics

While the elusive surplus target will likely be reached next financial year, the longer-term Budget outlook is not on as solid ground. We don’t expect much of today’s revenue strength to be sustainable, which is a problem, since Treasury’s forecast methodology tends to ‘bake in’ temporary revenue strength as permanent.

First, commodity prices are currently being propped up (yet again) by China’s government stimulating construction activity to support the country’s slowing economy. This won’t be permanent. Second, while Australian wage growth is increasing), it’s still a long way off reaching the levels forecast by Treasury in its latest Budget. Both of these factors mean the outlook for the government’s two largest revenue sources weakens over time. We still forecast small surpluses of around 0.7% of GDP for both 2020-21 and 2021-22, but they are far from guaranteed.

The upcoming election could see both sides of politics use the current temporary revenue boom to make permanent spending and tax promises, leaving the future Budget position more exposed to any future economic downturn. To those who remember the tax cuts and new spending policies during the 2000s commodity price boom, this may sound familiar. Caution is needed from both sides, or that elusive surplus may stay just that – or be short-lived at best.

For more information on the Australian brief, please contact co-authors David Rumbens and Ben Guttmann.

UK economic briefing by Ian Stewart

A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. Subscribe to and view previous Monday Briefings at: http://blogs.deloitte.co.uk/mondaybriefing/

  • Depending on how Brexit goes 2019 could see UK growth accelerate or almost grind to a halt. So, say two forecasting groups which have modelled the economic effects of the UK’s exit from the EU.
  • The UK’s National Institute of Economic and Social Research (NIESR) and the Organisation of Economic Cooperation and Development (OECD) have come to broadly similar conclusions. They estimate that with a deal and a transition UK GDP growth would average around 1.6% in 2019 and 2020. This would represent a modest acceleration from growth of roughly 1.3% this year. The expectation is that with Brexit risk reduced, activity, especially business investment, would bounce back.
  • Without a deal the NIESR and the OECD estimate UK growth would slow sharply, with the economy expanding by an average of about 0.4% over 2019 and 2020. This points to near stagnation in activity – though not a severe or protracted recession.
  • All forecasts need to be taken with a large pinch of salt. It is difficult to estimate how fast the economy grew in the previous quarter – let alone forecast what it will look like in one or two years’ time. Forecasts are fallible, and the longer term the forecast the more fallible it is.
  • Yet they are a worthwhile starting point for thinking about the future. Forecasts provide a structured way of assessing how a multitude of factors could combine to influence growth. The output – a GDP forecast – is a condensed summary of a complex view of the world.
  • There is no precedent for a no-deal exit from the EU. But past events – from the EU referendum in 2016 to the disruption of the three day week in 1974 and the euro debt crisis – offer clues.
  • A no deal exit might be expected to affect growth through three main channels. Any weakening in business and consumer confidence would weigh on investment and household spending. A fall in the pound would fuel inflation and squeeze consumer incomes. Regulatory disruption and uncertainty would tend to slow activity, much as the 2000 fuel protect did.
  • There is less concern today than in 2016 that a no deal exit might trigger a renewed credit crunch. Financial markets seem to think that the banks are well positioned to cope with such an eventuality. Last week the governor of the Bank of England, Mark Carney, noted that even when the risks of a no deal exit rise there is no rise in the cost of borrowing for banks.
  • The profile of UK growth in the coming months could become choppier as firms and consumers seek to insulate themselves against the risk of disruption by building stockpiles.
  • In its latest edition, The Economist announced that it is stockpiling around 30 tonnes of the paper for its UK print edition. Last week Majestic Wine said it would increase UK stock levels by up to 1.5 million bottles of wine. UK food retailers are also reported to have considered building stocks, though limited storage capacity, especially for fresh food, make this difficult.
  • Increased stockpiling adds to current activity at the expense of reducing future growth (In GDP terms it represents growth brought forward). The effects on quarterly GDP growth can be significant, making it harder to assess the underlying momentum of growth.
  • The official independent forecaster, the Office for Budget Responsibility (OBR), argues that if supply bottlenecks were to persist after Brexit output could decline significantly. The OBR drew comparisons with the introduction of an emergency three day working week in early 1974. It was made necessary by a miners’ strike which disrupted energy supplies and made full-time working impossible. Short time working contributed to a near 3% fall in quarterly output.
  • So how might the authorities respond to a no-deal exit? The Chancellor, Philip Hammond, has hinted at the need for a special Budget in such circumstances. It might seek to counter any immediate knock to growth by boosting public spending and cutting taxes.
  • Mr Carney has suggested that the Bank of England would be inclined to see a no-deal Brexit as a supply shock which would exacerbate bottlenecks and increase inflation risks. As such, the appropriate response, Mr Carney said last week, would be to raise interest rates.
  • Whether, faced with a sharp slowdown in growth, the Bank would follow through on this remains to be seen. Raising rates in the wake of a no deal exit would be politically controversial and economically contestable. Financial markets take the view that if the UK leaves without a deal the chances are that interest rates will be cut, not raised.
  • Finally, it’s worth noting that Brexit will be a major, but not the only factor, influencing UK growth in the next couple of years. The external environment, financial conditions and the unfolding path of the domestic economic cycle matter too.

PS: There has been a remarkable turnaround in the number of manufacturing jobs in the US. The number of American manufacturing jobs fell by 60% from the turn of the century to 2010. Since then, it has risen by 11%. While President Trump made the on shoring of manufacturing jobs part of his 2016 election campaign pledge, a modest revival in manufacturing may have already been well underway.

The FTSE 100 ended the week down 0.9% at 6,953.

Economics and business

  • The oil price fell below $60 a barrel due to growing US supply, US pressure on Saudi Arabia to maintain production levels and slowing global growth
  • The OECD urged governments to prepare spending plans should the global economy slow sharply, given that central banks have little ammunition left
  • US durable goods orders fell in October by the most in over a year
  • Euro area manufacturing activity extended its decline in November, falling to a four-year low, according to PMI data
  • Euro area consumer confidence dropped in November to its lowest level in a year and a half
  • The European Central Bank said it believes the recent run of bad economic data will prove a temporary blip and it still anticipates withdrawing crisis-era stimulus at the end of the year
  • The OECD downgraded its global growth forecast for 2019 to 3.5%, and warned that the trade war between the US and China risked a much sharper slowdown
  • American electric car maker Tesla cut prices in China by as much as 25% to offset the impact of the US-China trade war on consumers
  • US mortgage refinancing fell to an 18-year low in November in a sign that higher interest rates are deterring borrowing
  • The European Commission will start disciplinary action against the Italian government over its spending plans which risk Italy “sleepwalking into instability”
  • IKEA is to cut up to 7,500 jobs as the world’s largest furniture retailer responds to a rise in online shopping
  • The board of Japanese car maker Nissan voted to sack its chairman Carlos Ghosn after allegations of unlawfully understating his pay
  • The US appealed to its allies to avoid buying hardware from Chinese telecoms maker Huawei over security concerns
  • The US is considering limiting exports of advanced technology to China as it seeks to protect US innovation from Beijing
  • Google will launch transparency tools ahead of the 2019 European Parliament election to combat the manipulation of the public vote
  • The price of Bitcoin fell below $5,000 from its high of almost $20,000 as pressure on regulators to increase their oversight grew

Brexit and European politics

  • The UK and EU agreed a draft declaration that pledges “ambitious, broad, deep and flexible partnership across trade and economic cooperation, law enforcement and criminal justice, foreign policy, security and defence”
  • Spanish prime minister Pedro Sánchez said Spain will reject the draft Brexit deal without clarification on the future status of Gibraltar
  • The EU is to warn the UK that it must agree to European access to British fishing waters well before the end of the Brexit transition period, the FT reports
  • The OECD said “it is imperative that the EU and the UK manage to strike a deal that maintains the closest possible relationship between the parties”
  • Majestic Wine announced it will spend an extra £8m buying more supplies to mitigate potential Brexit-related disruption
  • The New Zealand government has launched a consultation about a new free trade agreement with the UK
  • Stephen Barclay was appointed as the new Brexit secretary and Amber Rudd as the Work and Pensions secretary following the resignations of Dominic Raab and Esther Mcvey

And finally…

  • Japanese opposition lawmakers accused the minister for cyber security Yoshitaka Sakurada of making a mockery of his new role after he admitted to never having used a computer – artificial intelligence


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