07 Apr 2017
" There may be some slippage in fiscal tightening and small additional stimulus for the economy."
Cherelle Murphy, Senior economist, ANZ
The Commonwealth Government is likely to use additional revenue from higher-than-expected commodity prices - plus new savings measures - as an offset to higher-capital spending and the removal of ‘zombie’ policy measures.
ANZ Research’s expectation is Australia’s projected underlying cash deficits will be slightly larger than stated in Mid-Year Economic and Fiscal Outlook (MYEFO) in December - but in a small surplus position by 2020-21.
The net operational balance (an accrual measure that does not include capital spending) will likely be emphasised and is also expected to project a surplus by 2020-21. This means there may be some slippage in fiscal tightening and small additional stimulus for the economy.
While these are our expectations of what will be projected in the budget, they will not necessarily be delivered in practice. The actual budget results have not been as optimistic as the budget papers have suggested in any year since the global financial crisis.
Much of the additional capital spending to fund infrastructure is likely to be ‘off-budget’ equity injections into non-financial public corporations.
These will fund the Government’s Snowy Hydro Scheme, the Melbourne to Brisbane Inland Rail, possibly Badgerys Creek airport in Western Sydney and some additional smaller projects.
Net debt projections will therefore push above the current peak of 19 per cent of gross domestic product and the cost of servicing debt will be higher.
Australian Treasurer Scott Morrison has said debt will be classified as ‘good’ or ‘bad’ and assigned across portfolios which is merely a presentational difference.
Neither rating agencies nor the market will accept a good/bad split on infrastructure spending and debt without casting a critical eye on where the money is going.
ANZ Research’s view based on the information we have is Australia’s triple-A rating from all three of the major agencies will be safe.
The Government’s spending, both ‘on budget’ (which is most immediately important for the rating agencies) and ‘off budget’ will not be so large or irresponsible to threaten a projected return to surplus sometime near the end of the forward estimates or shortly thereafter. Debt will remain serviceable.
Interestingly after several decades of privatisations, Government investment in public corporations, in a similar vein to NBN Co., represents a new wave of public corporatisation.
ANZ Research is broadly supportive of the Government presenting fiscal accounts in a way which emphasises the operating versus capital split if it encourages ‘good’ infrastructure spending and lifts the economy’s potential growth rate.
But a better budget would emphasise the operating balance and the headline cash balance. The headline balance gives a better indication of the Government debt requirement and therefore its overall fiscal health.
Cherelle Murphy is a senior economist at ANZ
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
07 Apr 2017
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