Cormann holds the line on spending, but wage stagnation to continue

Stronger revenues and spending discipline will see a smaller deficit this year and a slightly bigger surplus in 2019-20, according to this morning’s Mid-Year Economic and Fiscal Outlook, but workers face another year of wage stagnation as the government again cuts its wage growth forecasts.

It’s a strong set of numbers for the government, though likely to be entirely overshadowed by another Nationals sex scandal and the sudden resignation of Andrew Broad this morning. But this year’s forecast budget deficit of $14.5 billion has reduced significantly, and is now expected to come in around $5 billion, while next year’s forecast surplus has nearly doubled to $4.1 billion. That’s been fueled by substantial upward revisions to revenue: this year’s revenue is up another $9 billion since May; next year’s forecast is up $2 billion as well. That reflects stronger terms of trade — now expected to edge up 1.25% in 2018-19 instead of falling more than 5%, although Treasury now expects a marked deterioration in 2019-20 of 6%.

However, Mathias Cormann has also — unusually, in a government facing an election — held the line on spending, which will be marginally lower this year than forecast. This reflects that it is fueling its current spending promises from savings elsewhere, as promised.

Nonetheless, there is more than $1.5 billion in unannounced spending measures locked in between this year and 2020-21 and a massive $9 billion in revenue cuts also unannounced, meaning the government will be entering the election with a $10 billion+ war chest of measures already in the budget.

For the third year running — and for the seventh out of the last eight years — the budget Wage Price Index (WPI) forecast has been reduced, with Treasury now expecting workers to see just 2.5% wages growth this year, rather than the 2.75% optimistically forecast in May.

Next year’s WPI forecast has also been scaled back to a still-optimistic 3%, which is where the government thought we would be this year, when it put together the 2017 budget. That sees household consumption growth scaled back to 2.75% and, along with lower forecasts for business and housing investment, means a cut in the GDP forecast from 3% back to 2.75%.

Even so, the government remains optimistic on unemployment, with figures expected to stay around 5% rather than 5.25% off the back of stronger jobs growth.

So, no surprises: the revenue surge the government is enjoying will get us back to surplus a little earlier than expected a couple of years ago, but economic growth remains tepid, and not enough to provide the turbocharged jobs growth that would get unemployment permanently below 5%. And workers — especially private sector workers outside the booming health sector — will face yet another year of stagnant wages, the only comfort being downgraded CPI forecasts.

The government deserves credit for keeping spending in check, but its complete lack of a policy response on wages may well see it receive little from the electorate.

Budget surplus (deficit)

2018-19: -$5.2 billion (down from -$14.5 billion in the budget)

2019-20: $4.1 billion (up from $2.2 billion in MYEFO)

Spending

2018-19: $483.4 billion (down from $484.6 billion in the budget); 24.9% of GDP

2019-20: $497.4 billion (down from $497.5 billion in the budget); 24.8% of GDP

Revenue

2018-19: $482.1 billion (up from $473.7 billion in the budget), 24.9% of GDP

2019-20: $506 billion (up from $503.7 billion in the budget), 25.2% of GDP

Economic forecasts for 2018-19

• GDP: 2.75% (down from 3% in the budget)
• Unemployment rate: 5% (down from 5.25%)
• CPI: 2% (down from 2.25%)
• Nominal GDP: 4.75% (up from 3.75%)
• Terms of trade: 1.25% (up from -5.25%)
• Household consumption: 2.75% (down from 3%)
• Dwelling investment 1% (down from 1.5%)
• Total business investment 1% (down from 3%)
• Wage price index: 2.5% (down from 2.75%)

Economic forecasts for 2019-20

• GDP: 3% (unchanged from the budget)
• Unemployment rate: 5% (down from 5.25%)
• CPI: 2.25% (down from 2.5%)
• Nominal GDP: 3.5% (down from 4.75%)
• Terms of trade: -6% (down from -2.25%)
• Household consumption: 3% (unchanged)
• Dwelling investment -4% (down from 0)
• Total business investment 5% (up from 4.5%)
• Wage price index: 3% (down from 3.25%)