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The Federal Budget may have been relatively unexciting from a superannuation point of view but there are some interesting insights to be gained from examining the Economic Outlook.
Treasurer Josh Frydenberg and Prime Minister Scott Morrison have claimed the Budget is ‘back in black’ with a forecast surplus (not an actual surplus) of $7.1 billion for 2019-20. However, many economic forecasts have been revised down since the Mid Year Economic and Fiscal Outlook (MYEFO) 2018-19 announced in December last year.
Real GDP growth for 2018-19 has been revised down from 2.75% forecast in December to 2.25% forecast today. The real GDP projection for 2019-20 was revised down from 3% to 2.75%, while the projection for 2020-21 in the MYEFO of 3% was also revised down to 2.75%.
The Economic Outlook confirms the fall in the property market is real with just 0.5% growth in dwelling investment forecast for this year and a big drop of 7% forecast for 2019-20. That slows to a fall of 4% in 2020-21.
Those numbers are big adjustments from the MYEFO forecasts, which had forecast an increase of 1% this financial year and a drop of 4% in the 2019-20 financial year.
Treasury acknowledges the detraction of the housing market on growth.
“Following declines in housing prices and building approvals, partly in response to a rebalancing in supply and demand, dwelling investment is expected to detract from growth,” the Economic Outlook states.
In January 2019, residential building approvals had fallen by almost 40% over the previous two years, with the fall concentrated in high-density projects. Weaker sentiment and tighter credit requirements are big factors in the drop off in dwelling investment.
Capital city house prices have fallen by 8.6% from their peak in September 2017, with the largest falls in Sydney and Melbourne. Although prices in those two cities still remain around 40 to 50% higher than their 2012 levels.
Forecasts for wages growth and household consumption have also been revised down from their MYEFO predictions. The MYEFO had the wage price index growing at 2.5% for 2018-19, 3% for 2019-20, and 3.5% for 2020-21. The wage price index is still forecast to grow at 2.5% for this financial year, but only 2.75% for 2019-20 and 3.25% for 2020-21.
Household consumption forecasts fell from 2.75% in the MYEFO for 2018-19 to 2.25% in the Budget’s Economic Outlook and a 3% forecast for 2019-2020 was revised down to 2.75%.
International growth is also expected to slow over the coming years, according to Treasury, which has revised down its forecast over the past six months from 3.75% for 2019 to 3.5%.
“A slight downgrade to the forecast for global growth compared with the MYEFO largely reflects slowing growth outside of Australia’s major trading partners,” Treasury said addressing the adjustment.
In a nutshell, it’s important not to get caught up in the hubris of a “projected surplus” and the “back in black’ chant that started Josh Frydenberg’s Budget Speech tonight. While the Treasurer went to great lengths to explain why a surplus was important due to interest savings, there are other ways to boost balance sheets.
Future growth will be dependent on whether Australians start spending again and household consumption picks up, and that will depend on whether they have the buying power – ie wages increases – to do that. The Budget’s proposed tax cuts could help, but with one sitting week left before the Federal Election is expected to be called, those cuts will be very much contingent on the Government getting re-elected in May.
For the first time in a long time, the Opposition’s Budget Reply on Thursday night – and its position on tax cuts – may be of just as much interest as Frydenberg’s Budget speech tonight.