Australia Deficit Improves, Wages to Remain Stagnant

The Australian government’s Mid-Year Economic and Fiscal Outlook was released Monday, revealing that Australia’s underlying cash deficit is now expected to stand at $23.6 billion for 2017/18, some $5.8 billion lower than the level forecast in May.

Expected government revenues were revised up by $3.6 billion, driven by higher forecasts for company tax, with stronger-than-expected collections, increased company profitability, and ATO enforcement activity, contributing to the budget’s expected improvement, Business Insider reported.

Longer-term, the government still sees the budget returning to the black in 2020/21, forecasting a surplus of $10.2 billion, well above the $2.7 billion level forecast in the May budget.

While there has been little reaction in Australian financial markets to the MYEFO release given recent trends in monthly receipts and expenditure data, let’s see what economists have made of the government’s latest fiscal assessment.

Martin Petch, Moody’s Investors Services said: Overall, the modest changes in Australia’s fiscal and economic outlook maintains a credit-positive commitment to returning the budget to a surplus in fiscal 2021.

Moody’s continues to see risks that fiscal deficits will be wider for longer than the government projects. This reflects our expectation for more subdued nominal GDP growth than over the past decade, a consequent dampening of revenue generation and a testing climate for spending restraint. The mild reduction in the expected profile for wages growth embodied in the forecasts remains a concern.

Treasurer Scott Morrison’s mid-year budget review showed deficits and debt smaller than predicted in May. While treasury’s economic growth forecast was shaved to 2.5% for this financial year—due to weak household consumption—it’s expected to accelerate to 3% in 2018/19, ABC News reported.

Employment is also expected to improve. Amid the positive news, the prediction for wages was reduced over the next four years.

The treasurer, like Reserve Bank Governor Philip Lowe, expects that as the labor market continues to tighten as the unemployment rate falls, wages should rise. More investment and stronger economic growth will also deliver higher wages. “The money won’t fall from the sky for wages. It won’t fall from the government,” Morrison says.

However, it’s a vicious circle. If wage growth doesn’t improve, household consumption will remain subdued, imposing a drag on economic growth and the budget.

Prime Minister Malcolm Turnbull has repeatedly promised to put more money in people’s pockets.