Dr Brendan Rynne, KPMG Chief Economist responds to MYEFO statement
On one hand the Government’s Mid-Year Economic and Fiscal Outlook (MYEFO) presents a straightforward assessment of the current economic challenges facing the nation. The Government has wound back some of the key economic parameters from its April Budget, including real wages growth, inflation, unemployment and nominal GDP, and has adjusted associated revenue estimates accordingly for these changes.
However, it has also assumed various expenditure savings that, given those adjusted economic circumstances, look optimistic. For example, personal benefit payments – which include welfare payments for veterans, children and the disabled – have been forecast to decline by more than $1.3bn compared to the Budget. While payments to the unemployed have been forecast to increase by $500m (reflecting the fact that more people will be unemployed for longer, or newly unemployed) the savings predominantly reflect a reduction of nearly $700m in payments to the disabled.
Looking at the revenue side more specifically, KPMG notes that the tax receipts remain surprisingly high:
- Income taxes might have been expected to drop a little given softer nominal wage growth, and the likelihood of lower employment growth to come.
- Corporate taxes projections look ambitious, given year to date drop of $1.6bn – which means CIT would have to increase by $900m over remainder of year.
- GST looks about right given drop off in consumption spending.
We believe the real question marks surrounding MYEFO relate to the expenditure side of the government accounts.
Comparing the Commonwealth Department of Finance October 2019 Monthly Financial Statement to MYEFO we note that social security payments are tracking proportionally higher compared to the same time last year – 34.6% of the anticipated expenditure in the Budget had been spent by the end of October 2019, compared to 33.0% by the end of October 2018.
The spending profile for health is even more pronounced, with 35.2% of the anticipated expenditure in the budget for health being spent by the end of October 2019 compared to 29.8% by the end of October 2018. Given the issues surrounding the take-up of private health insurance by younger Australians, it is likely that the public health system is going to receive more pressure (and not less) as the year progresses; so the ability of the health system to bring this expenditure profile back into budget looks limited
MYEFO also shows the Government has included an extension to the efficiency dividend of $130m for FY20 – increasing to $360m, $480m and $470m over the remainder of the forward estimates – but the announced machinery-of-government changes are likely to cost the Government in the short term, with issues such as integrating departments together and redundancy payments for excess senior public servants.
On the basis that there is no catch-up in tax receipts and government expenditures continue to be proportionally higher than anticipated, then KPMG anticipates that even the revised Budget surplus proposed by MYEFO of $5bn is questionable. Our best case estimate is for a surplus of about $2bn, which is wafer thin; meaning we are unlikely to see any further major fiscal policy expansion, if the government wants to maintain the surplus.