Today’s Mid Year Economic and Fiscal Outlook (MYEFO) confirms that the Budget is projected to return to balance in 2020-21.
The underlying cash deficit is now expected to narrow from $36.5 billion or 2.1 per cent of GDP in 2016-17 (down on the $37.1 billion reported in the Budget and PEFO) down to $10.0 billion (0.5 per cent of GDP) in 2019-20.
The average annual pace of fiscal consolidation is 0.5 per cent of GDP over the forward estimates period, also in line with the Budget and PEFO.
Since PEFO the total effect of parameter and other variations – but not policy decisions – has been to negatively impact the Budget by $12.8 billion. This includes a $30.5 billion downward revision of revenue, driven principally by weaker wage and profits growth and weaker collections, offset by $16.5 billion in reduced payment estimates.
MYEFO confirms that the Government's plan to restore the Budget to balance remains on track.
Importantly the net impact of policy decisions made by the Government, including fully funding all election commitments, has been to improve the Budget by $2.5 billion, with net improvements of more than $2 billion in payment savings and just under net $500 million in increased revenue.
In each and every year of the Budget and Forward Estimates, net policy decisions of the Government have improved the Budget bottom line, including net payment savings in each and every year.
Despite the many global and domestic challenges we face in our economy, an accumulated deficit of $94.9 billion over the Budget and Forward Estimates, means Australia's fiscal outlook in this MYEFO is in a better position today than it was a year ago, when it was $108.3 billion, and three years ago, when it was $122.7 billion.
Once again the Government has demonstrated that we do not spend more than we save, and that the predominant mechanism for restoring the Budget to balance is by getting expenditure under control.
By contrast the net effect of Labor's policy decisions at the last election was to increase the deficit by $16.5 billion.
MYEFO confirms that Government payments as a share of GDP have declined since the 2016 PEFO from 25.8 per cent of GDP to 25.2 per cent of GDP in 2016-17, and remain steady at 25.2 per cent of GDP over the forward estimates.
As we tackle the deficit legacy we also continue to arrest the debt. Net debt is projected in MYEFO to peak lower at 19.0 per cent of GDP, compared to PEFO, but one year later in 2018-19, and then decline over the medium term to around 10 per cent.
Any additional spending commitments have been more than offset by spending reductions in other parts of the Budget and not through higher taxes.
Government payments, including parameter changes will actually be less than set out in the Budget and PEFO. The combined impact from both policy decisions and variations means nominal payments are lower in each year of the forward estimates and total payments are forecast to reduce by $18.5 billion across the Forward Estimates compared to the 2016 PEFO.
Since our re-election in July 2016, the Government has made significant progress in working with the Parliament to legislate measures to repair the Budget.
The passage of the Omnibus Savings Package secured $6.3 billion in savings over the forward estimates growing to around $25.4 billion over the medium term.
The total impact over the forward estimates of Budget repair measures implemented since the 2016 election, including through appropriations and regulations, exceeds $22 billion. It also contains a revised estimate of the value of un-legislated budget repair measures still to be supported by the Parliament at $13.2 billion, including $12.5 billion in payment savings.
This means in just six and half sitting weeks, the Parliament has legislated almost two thirds of the Government's Budget repair measures. The ability to secure passage of Budget repair measures has been a consistent issue raised by ratings agencies with reference to their assessment of our fiscal position.
The 2016-17 MYEFO confirms that the Government remains committed to repairing the Budget by controlling expenditure and returning the Budget to balance as soon as possible.
Sustained discipline to offset new expenditure and pass existing Budget repair measures is needed to consolidate the Budget and to lower government debt, particularly against the continuing backdrop of a challenging global economic outlook.
The Government is committed to working with the Parliament in 2017 to continue to legislate the savings measures included in the Budget bottom line. There is more work to be done and we will continue to work with the Parliament to this end in next year’s autumn sittings.
The Australian economy continues to transition from the investment phase to the production phase of the mining boom despite a downward revision to the real GDP growth forecast, partly due to the negative result in the September Quarter National Accounts.
Economic growth is expected to increase over the forecast period, as the drag from the decline in mining investment dissipates and the economy transitions to broader-based growth, supported by historically low interest rates and a lower Australian dollar.
Real GDP is forecast to grow by 2 per cent in 2016-17, partly reflecting the decline in GDP in the September quarter 2016. Economic growth is expected to pick up to 2¾ per cent in 2017-18 as the detraction from mining investment eases.
Exports and household consumption are expected to support growth, with dwelling investment higher in the near term. Non-mining business investment is expected to increase modestly over coming years.
Nominal GDP growth is expected to be 5¾ per cent in 2016-17, stronger than at PEFO. This largely reflects the recent strong gains in commodity prices.
The strength and volatility of commodity prices have presented a particular challenge in framing the forecasts and projections. After extensive industry and market consultation, Treasury judged it prudent to adopt more conservative assumptions for bulk commodity prices than usual.
Growth in employment will be sustained by continued economic growth and subdued wage growth. The unemployment rate is expected to be relatively stable over the forecast period. With spare capacity in the labour market expected to persist, growth in household incomes and domestic prices are forecast to remain subdued, which highlights the importance of policies that encourage economic growth.
To support economic growth the Government will continue to implement our national plan for jobs and growth. This plan is not only necessary to increase living standards, but to underpin revenue growth for the Australian Government by supporting increased earnings for employees, companies and their shareholders. This will support returning the Budget to balance and paying down debt thereafter.
The Government remains cautious about overtaxing the Australian economy on the basis that it constrains growth and hence revenues. This assumption provides the Government with the flexibility to adjust tax policy in the future as well as accommodating our enterprise tax plan, without impacting on the medium term position.
At the last election Labor’s high tax and spend policies abandoned their previous commitment to the tax-to-GDP cap in their fiscal estimates to allow them to accommodate their $100 billion in higher taxes over the decade.
The 2016-17 MYEFO provides a responsible, conservative and transparent update of the Australian Government's fiscal position. It once again reinforces the need for the Parliament to support the Government's legislation to repair the budget and restore it to balance, in line with the projections.
The Mid-Year Economic and Fiscal Outlook for the 2016-17 financial year is available on the 2016-17 Budget website.