Has Morrison ‘turned the debt ship around’?

Spinning the Mid-Year Economic and Fiscal Outlook (MYEFO), Treasurer Scott Morrison has pointed to projected reductions in the 2017-18 budget deficit, and a better-than-anticipated return to surplus in 2020-21 as evidence of improved fiscal discipline.

That is a small part of the story. What is more relevant is a strengthening global economic outlook, and a continuing contribution to the Australian economy from resource-hungry China.

Sluggish wages growth is proving a drag on GDP numbers. MYEFO projects real GDP growth in 2017-18 of 2.5%, rising to 3% in 2018-19.

The 2017-18 forecast is marginally below budget predictions.

However, a lift in company profitability and thus tax receipts has bolstered the economic outlook. MYEFO is projecting a budget deficit for 2017-18 of $23.6 billion, down $5.8 billion on budgetary forecasts.

“This is largely driven by higher forecasts for company tax due to stronger-than-expected tax collections, increased company profitability, and ATO enforcement activity,’’ Morrison said.

“At the same time, lower forecasts for wages and unincorporated business income are expected to weigh on individual income receipts.’’

Company tax receipts will exceed forecasts by about $3.6 billion in 2017-18, and $2.8 billion over the balance of the forward estimates to 2020-21.

MYEFO is forecasting a budget surplus of $10.2 billion in 2020-21 compared with a projection of $2.7 billion in the May budget.

Inevitably, an improving budgetary outlook will prompt further speculation about personal income tax cuts at a time when the government is seeking to claw back ground it has lost to the Labor opposition.

Among options would be to announce cuts in the forthcoming May budget to take effect from election year 2019.

It is not the smallest of ironies that in the week of a byelection during which the government drew unfavorable attention to China’s influence on Australian politics, Chinese demand for commodities remains the bedrock to an improving economic outlook.

Prime Minister Malcolm Turnbull might have said Australia had “stood up’’ against foreign influence in its internal affairs. Equally, it could be observed the economy, now in its longest expansion on record, has been helped to “stand up’’ because of continued Chinese demand for iron ore, coal and soft commodities.

Morrison and Finance Minister Mathias Cormann would have you believe that prudent economic management has delivered a better-than-anticipated mid-year outlook, but, in reality, government spending restraint is a minor part of the story.

Understandably, Morrison in his MYEFO statement trumpeted job creation as a sign of strengthening economic activity, but this is not feeding through into household consumption. This remains subdued and is cause for ongoing concern.

Consumers lack confidence. The retail sector is under significant pressure, notwithstanding inflation remains in check and interest rates are at historic lows. The consumer price index (CPI) to September was up a modest 1.8% for the year.

As expected, the MYEFO statement incorporated a squeeze on higher education spending. The government plans to save slightly more than $2 billion by freezing — at 2017 funding levels — total Commonwealth Grant Funding from 2018. It will also impose limits on fee assistance under various student loan schemes.

Australia debt outlook is showing improvement. Net debt as a percentage of GDP is expected to come down over the forward estimates to around 17% from the current slightly more than 19%.

Morrison’s claim this is evidence of “turning the debt ship around’’ might be regarded as premature.

Labor spokespeople took issue with the Treasurer’s claims of a significantly improving outlook. They noted that budget projections of increased wages growth had not materialised.

What remains to be seen is whether an improving economic outlook can be sustained.