Budget update shaves growth and wage forecasts but is brighter about the deficit


Michelle Grattan, University of Canberra

The 2017-18 budget update shows an improvement in the deficit forecast for this financial year but predicts lower economic growth and a smaller increase in wages than was expected in the May budget.

The deficit for 2017-18 is now expected to come in at A$23.6 billion, an improvement of A$5.8 billion from the May forecast, according to the Mid-Year Economic and Fiscal Outlook released by Treasurer Scott Morrison and Finance Minister Mathias Cormann.

Growth for this financial year is forecast to be 2.5% compared with the budget’s 2.75%, reflecting recent lower-than-expected growth in household consumption.

Nevertheless Morrison and Cormann said Australia’s growth story “remains a compelling one, and although real GDP growth has been slightly tempered in 2017-18, the trajectory is upward”. Real GDP is forecast to grow at 3% in 2018-19, the same as the budget number.

Budget update on wages

The update notes that wage growth “remains low by historical standards in both the public and private sectors and has been more subdued than expected since budget”.

Wages are forecast to increase by 2.25% through the year to the June quarter 2018 and 2.75% through the year to the June quarter 2019.

This is 0.25 of a percentage point lower in both years compared with the budget – vindicating the scepticism that economists expressed about the budget forecast being too optimistic.

The flat wages situation reflects a serious political pressure point for the government, as many people struggle with high power prices and other squeezes on their cost of living.

“Wage growth is forecast to lift as the economy strengthens, inflation picks up and excess capacity in the labour market is reduced,” the update says.

Budget receipts have been revised upwards by about A$3.6 billion in 2017-18 and A$2.8 billion over the forward estimates compared with budget time – driven mainly by company tax and superannuation tax. The company tax forecasts reflect increased profitability and enforcement activity by the Australian Taxation Office.

But “over the forward estimates, lower forecasts for wages and unincorporated business income are expected to weigh on individuals’ income tax receipts,” the update says.

The half yearly revised numbers confirm that the budget is on track to have a surplus in 2020-21. The projected surplus of A$10.2 billion in that year is A$2.7 billion better than estimated in May.

Savings measures on education and welfare

The government has announced in the update a new welfare crackdown to save money and also an alternative higher education savings package after it could not pass its earlier proposals.

Savings of A$1.2 billion over four years will be reaped by broadening the criteria for waiting periods for new migrants before they can get various welfare benefits.

The changes will extend the present two-year waiting period for a range of payments, such as Newstart, to three years, and introduce a consistent new three-year waiting period to apply to a further number of benefits such as Family Tax Benefit and Paid Parental Leave.

Social Services Minister Christian Porter said the measures “will reinforce the foundational principle that Australians’ expectation of newly arrived migrants is that they contribute socially and economically for a reasonable period before having access to our nation’s generous welfare system”.

The higher education package includes a freeze on total Commonwealth Grant Scheme funding from January 1, set at 2017 levels, and a combined limit for all tuition fee assistance under all HELP and VET Student Loans.

The government will also pursue an alternative set of HELP repayment thresholds from July 1 next year, with a new minimum repayment threshold of A$45,000, higher than the A$42,000 in the original plan. At present the threshold is A$55,000.

Most of the new higher education package doesn’t have to be legislated, thus avoiding the Senate hurdle. The previous higher education package was set to save A$2.7 billion over the forward estimates; the new one saves A$2.1 billion.

Real growth in payments over the budget period is expected to be an annual average of 1.9%. Compared with the budget, nominal payments are lower in every year of the forward estimates.

The payment to GDP ratio is expected to fall to 24.9% of GDP by 2020, slightly above the 30 year historical average.

Morrison told a joint news conference with Cormann: “As we push into the new year, there is still more work to be done but we are on the right track.

“Jobs and growth will continue to be our mission and our focus. Helping the lives of the thousands of Australians, millions of Australians, and their families and returning the budget back to balance.”

Cormann said: “This is a good set of numbers in all of the circumstances.”

Shadow treasurer Chris Bowen said the government remained committed to increasing the tax paid by working Australians. He said there was no mention of personal tax cuts – which Malcolm Turnbull has foreshadowed – in the update. People only got a tax rise.

He condemned the revised higher education package, saying it would particularly hit those from a lower socioeconomic background.

The ConversationThe chair of Universities Australia, Professor Margaret Gardner, said the package would leave university funding “frozen in time”. She said the blow would be hardest in areas where university attainment was lowest, such as regional areas.

Michelle Grattan, Professorial Fellow, University of Canberra

This article was originally published on The Conversation. Read the original article.

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Vital Signs: dismal wages growth makes a joke of budget forecasts



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Pay packets rose just 0.5% in the first quarter.
bradleypjohnson/Flickr, CC BY-ND

Richard Holden, UNSW

Vital Signs is a weekly economic wrap from UNSW economics professor and Harvard PhD Richard Holden (@profholden). Vital Signs aims to contextualise weekly economic events and cut through the noise of the data affecting global economies. The Conversation

This week: investor loans continue to rise, unemployment ticks down, wages growth remains distressingly low, and consumers are unconvinced the budget will improve their financial situation.


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Now that Australia’s two major political parties (and the Greens) have decided that robbing banks is legitimate public policy, we return our focus to how the Australian economy is actually functioning.

ABS data released Monday showed that investor housing loans rose slightly, up 0.8% on the previous month. The really interesting figures on this front are still to come, since the Australian Prudential Regulation Authority announced tighter macro-prudential measures – especially on interest-only loans – at the end of March. There are already some anecdotal suggestions that these have started to dampen investor demand, but there is no proper evidence yet. The next round of ABS housing finance data will certainly provide some clues.

The ABS also reported this week that first quarter wage growth was distressingly low, with pay packets rising just 0.5%. That puts private-sector annual wages growth at 1.8%. The main concerns here are, of course, for workers struggling to get by and the fact that rising levels of income inequality are not being dented by robust wage growth.

Added to this, however, is the impact of low wage growth on the budget, and the economy more generally. The RBA has pointed out in recent months that around one-third of mortgage holders have less that one month’s repayment buffer. As the cost of living keeps rising, but wages don’t, people with close to no wiggle room get squeezed more and more.

Last week’s budget, and the forecast return to surplus in 2020-21, was predicated in no small part on very robust wage growth.

On budget night I wrote that these wage growth assumptions were bullish and unlikely to eventuate. 3% going to 3.75% annual wage growth looks really aggressive against a stagnating 1.8 – 1.9% (counting the public sector’s slightly stronger growth). When wage growth is lower than it has been since the mid 1990s, how can one forecast with a straight face that the growth rate will double?

Ratings agency Standard & Poor’s certainly understands this. It almost grudgingly reaffirmed Australia’s AAA credit rating this week, but cast doubt on the projected return to surplus, saying “budget deficits could persist for several years, with little improvement, unless the Parliament implements more forceful fiscal policy decisions”.

Figures released Thursday showed the unemployment rate fell from 5.9% to 5.7%. This is seemingly good news, although this ABS series has been notoriously unreliable in recent times.

The workforce participation rate was steady at 64.8% – and this may be a better and more relevant measure of short-term fluctuations in employment.

There was also a continued shift to part-time employment. Total jobs were up 37,400, but people in full-time work fell by 11,600 and the number of part-time jobs was up 49,000.

Consumer confidence weakened a little in May according to the Westpac-Melbourne Institute Index. It was down a point to 98.0 in May (recall that for indices like these 100 is the level at which optimists and pessimists are in equal supply).

Westpac chief economist Bill Evans said:

Respondents’ confidence in housing and the outlook for house prices deteriorated sharply, while the assessment of the budget around the outlook for family finances was decidedly weaker.

And why wouldn’t it be? The budget contained essentially nothing to address the housing affordability crisis, further fuelling concerns that there will be a messy correction to prices.

Meanwhile, the government’s best ideas for how to grow wages and incomes were to waive a white flag about spending restraint, whine about how the Senate won’t pass their legislation (“this is a Senate tax”, said the treasurer on budget day), and launch a populist attack on our five largest banks.

And that attack – the bank tax – will be passed on to consumers, just like the last increase in regulatory capital required by APRA.

So the government raised the taxes of most Australians and blamed the cross-bench. That doesn’t fill me with confidence. And it seems I am not alone.

Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW

This article was originally published on The Conversation. Read the original article.

AUSTRALIA: NEW SOUTH WALES – The Deluge Set to Return


The deluge is set to return to the New South Wales coast tonight and tomorrow, with plenty of heavy rain on the way according to the latest forecasts. Predictions are for more flash flooding and flooding.

Rivers around about the place are already swollen and quite a number are in flood. The Myall River at Bulahdelah is still in flood, with water all about the place around here. More rain is set to produce more flooding almost immediately.

AUSTRALIA: BUSHFIRE DEATH TOLL MAY REACH 200


The death toll in Australia’s bushfire disaster in Victoria has now reached 131 confirmed dead, along with the solemn warning that that death toll could very well reach 200 plus.

Our country is in shock and stunned at the ferocity of the fires, especially on Saturday. Bushfires are an annual thing in Australia and our bushfires are among the worst in the world – yet this has been by far the worst ever.

The bushfire emergency is continues to unfold with fires burning across two states – Victoria and New South Wales. There have been hundreds of fires and dozens continue to burn – many out of control. There are some fires in Victoria that are yet to be attended by any fire-fighters as the current priority remains the saving of lives and property protection. Some 330 000 hectares plus have so far been burnt by the fires.

Fire-fighting crews are rushing to the bushfire region from across Australia and also from New Zealand. Great Britain has also offered assistance and doubtless other countries have also offered help.

As I write there are still homes and towns facing immediate threats from bushfire activity and residents are being warned to leave before it is too late or if remaining home to fight the fires and protect a home (should it be defendable), do not leave when it is too late to do so.

Sadly, many of these fires appear to have been deliberately lit and several arsonists have already been arrested. Many people in Australia are calling for blood. Many Australians are deeply shocked and upset by the bushfire emergency, as has been represented by the Prime Minister Kevin Rudd and the Victorian Premier – both of whom have fought back tears during interviews.

In 2009 there has only been 12mm of rain in the region where I live and in many other regions of New South Wales and Victoria there has been even less. We need rain and there seems very little of it in weather forecasts for the foreseeable future.

ABOVE: A collection of photos and tributes from the fire emergency

ABOVE: A tribute to Channel 9 Newsreader Brian Naylor and his wife – killed in the fires at their home.

ABOVE: Report on the fires

ABOVE: The Fire approaches Churchill – Victoria