Pre Election Fiscal Outlook
Today the Treasurer, the Hon. Wayne Swan and the Minister for Finance and Deregulation, the Hon. Lindsay Tanner, released the Pre-Election Fiscal Outlook (PEFO). The PEFO report is available online at http://www.treasury.gov.au/contentitem.asp?NavId=002&ContentID=1858About PEFOThe Charter of Budget Honesty Act 1998 (the Charter) provides for the Secretary to the Treasury and the Secretary to the Department of Finance and Deregulation to release publicly a Pre-Election Economic and Fiscal Outlook report (PEFO) within ten days of the issue of the writ for a general election. Such a writ was issued on 19 July 2010.The purpose of the PEFO is to provide updated information on the economic and fiscal outlook. The information in the report takes into account, to the fullest extent possible, all Government decisions made before the issue of the writ and all other circumstances that may have a material effect on the fiscal and economic outlook.In recognition of the limited time available to prepare the PEFO, the Charter provides that information which is unchanged from that provided in an earlier economic and fiscal outlook report may be summarised in the PEFO. The 2010 PEFO updates the estimates contained in the 2010-11 Budget (May 2010) and the Economic Statement (July 2010). Like the Economic Statement, the 2010 PEFO takes into account information contained in the March quarter national accounts. In addition, it includes all decisions taken by the Government since the 2010-11 Budget. The Economic Statement is available online at http://www.budget.gov.au/2010-11/content/economic_statement/html/index.htm.The following information is directly from the PEFO.Overview
- The Australian economy is expected to grow by 3 per cent in 2010-11 and 3¾ per cent in 2011-12.
- The underlying cash and fiscal balances are projected to remain in deficit in 2010-11 and 2011-12, returning to surplus from 2012-13.
Table 1: Summary of budget aggregates
a. Excludes expected Future Fund earnings.
- Fiscal and monetary stimulus is being withdrawn and there are early signs that private sector activity is picking up, although the transition to private sector led activity is proving to be a little slower than expected.
- Business investment — particularly mining investment — and exports are expected to strengthen over 2010-11 and 2011-12, driven by a substantial boost in the terms of trade and ongoing strong demand for Australian non-rural commodities.
- The global economy is continuing to recover although the pace of growth remains uneven, with emerging economies, particularly in Asia, growing much more strongly than advanced economies. The world economy is expected to grow by 4½ per cent in 2010 and 4 per cent in 2011.
- There are substantial downside risks to the global outlook, including the European sovereign debt crisis, uncertainty over whether the US recovery will gain traction, the challenge in China of addressing overheating and the difficulty across the advanced economies in managing fiscal consolidation in a fragile global environment. The renewed global uncertainty is weighing on financial markets and business confidence.
- Despite the heightened global uncertainty, robust growth in the Asian region is expected to continue to generate strong demand and high prices for non-rural commodities.
- The terms of trade are forecast to increase by 17 per cent in 2010-11 to record levels. The 17 per cent rise is an upward revision from the 14¼ per cent rise forecast at Budget. The rise is underpinned by substantial increases in the contract prices of Australia’s commodity exports, including iron ore and coal. The terms of trade are forecast to fall by 4½ per cent in 2011-12, a little more than at Budget, as increased global supply capacity starts to weigh on prices of some commodities.
- In line with this, nominal GDP is forecast to grow by 9¼ per cent in 2010-11 and 5¼ per cent in 2011-12, providing a substantial boost to incomes.
- Employment is expected to grow strongly, with the unemployment rate declining to 4¾ per cent in late 2011-12, around its full-employment level.
- Inflation is forecast to be 2¾ per cent through the year to the June quarter in both 2011 and 2012. Inflationary risks are on the upside, with the labour market reaching full capacity over the next year and the strong incomes boost from the terms of trade expected to see demand increasingly stretch the economy’s supply capacity.
Table 2: Major economic parameters(a) (b)
a. Real and nominal GDP are year-average growth. Employment and the Consumer Price Index are through-the-year growth to the June quarter. The unemployment rate is the rate in the June quarter.b. The parameters for 2010-11 and 2011-12 are forecasts and those for 2012-13 and 2013-14 are projections.Source: ABS cat. nos. 5206.0, 6202.0, 6401.0 and 6345.0, Treasury.Fiscal outlook
- An underlying cash deficit of $40.7 billion (or 2.9 per cent of GDP) is estimated for 2010-11.
- A fiscal deficit of $39.4 billion (or 2.8 per cent of GDP) is estimated for 2010-11.
- The fiscal outlook is for a continuing reduction of underlying cash and fiscal deficits until a forecast return to surplus from 2012-13. This is consistent with the outlook published in the 2010-11 Budget and the Economic Statement.
Table 3: Australian Government general government sector budget aggregates
a. Excludes expected Future Fund earnings.Underlying cash balance estimates
- Policy decisions taken after the 2010-11 Budget and up to the Economic Statement reduced the underlying cash balance by $132 million in 2010-11 and by $5.6 billion over the forward estimates (including $7.5 billion from changes to the resource tax arrangements).
- Policy decisions reported in the PEFO have increased the underlying cash balance by $24 million in 2010-11 and reduced the underlying cash balance by $40 million over the forward estimates.
Net debt and net financial worth
- Net debt for the Australian Government general government sector is estimated to be $80.6 billion (or 5.7 per cent of GDP) in 2010-11, which is broadly consistent with the forecast in the 2010-11 Budget and the Economic Statement.
For further information please contact your Hawker Britton consultant – www.hawkerbritton.com.