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Australia - Fiscal Balance

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Australia - Fiscal Balance
Australian government presents 2016/2017 budget, revises upwards expected fiscal deficits

On 3 May, Australia Treasurer Scott Morrison presented the Federal budget to the Australian Parliament for fiscal year 2016/2017, which runs from 1 July 2016 to 30 June 2017. This is the first budget to be presented by Prime Minister Malcolm Turnbull’s administration and was announced approximately 60 days before the upcoming double-dissolution election that is scheduled to be held on 2 July. Aside from the political dimension surrounding the budget release, its actual content did not offer many surprises. Turnbull’s government has acted prudently amid sluggish economic growth in Australia, holding off on any major expenditure in order to limit deficit spending, while refocusing government expenditure on job creation and growth. In terms of fiscal forecasts, the government foresees slightly larger fiscal deficits over the next four years compared to the figures published in the Mid-Year Economic and Financial Outlook (MYEFO) released in December. The government is still expecting the budget to move into surplus in 2020/2021 as the economy is expected to gather strength, which, in turn, will bolster revenues.

Small and middle sized businesses were some of the winners from this year’s budget, as they received a significant tax cut from 28.5% to 27.5%. Furthermore, more business will be able to take advantage of this tax break as the government plans on continuously expanding the middle size business bracket to larger businesses in coming years. Upper-middle income families also received a boost, as the budget raises the middle-income tax bracket to include higher earners. In terms of expenditure, the government is continuing with its AUD 50 billion infrastructure spending plan that started in 2013, however, there was a distinct absence of any new relevant infrastructure announcements and not much in the way of extra funding allocated to existing infrastructure projects.

In terms of government revenues, the government is attempting to close the budget gap by cracking down on tax avoidance, establishing a new so-called “Google tax” on multinational corporations that attempt to move profits offshore as well as increasing the taxation of tobacco products.

Rating agencies appeared more hesitant than usual to affirm Australia’s AAA rating after the budget was passed. In previous years, major credit rating agencies have reacted quickly to budget releases, immediately rubber stamping the country’s ‘Prime’ rating. However, this year, S&P Global Ratings hesitated to issue a rating decision, while Moody’s affirmed its Aaa rating, but issued a disclaimer noting that Australia is vulnerable to shocks to public finances which may affect its rating. Such concerns are likely due to the upward revision to Australia’s deficit in the run up to 2020/2021, along with increased government debt expectations. Analysts at the National Australia Bank point out that, although there are grounds for concern, the government’s conservative fiscal approach should keep Australia clear of a downgrade and stated:

“We have previously highlighted that rising debt and successive years of Governments pushing out the date when the Budget recovers has means Australia is pushing close to the boundaries for a AAA country. Our sense is the Budget has done enough to avoid a more stringent warning from the ratings agencies but a change in rating outlook is not out of the question.”

Overall the budget was associated with a mild contractionary fiscal policy, as the government attempts to rein in spending and reduce the deficit. The government expects the deficit to be 2.2% of GDP in FY 2016/2017, and to narrow to 1.0% of GDP in FY 2017/2018. FocusEconomics Consensus Forecast Panelists are less optimistic and see the deficit at 2.5% of GDP in calendar year 2016, and 2.1% of GDP in calendar year 2017


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