Release of the 2018-19 Mid-Year Economic and Fiscal Outlook

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Posted 19/12/2018 by Phillip Hawkins, Adrian Makeham-Kirchner and Liz Wakerly

The Government released the 2018–19 Mid-Year Economic and Fiscal Outlook (MYEFO) on 17 December 2018. This brief provides an overview of the key fiscal and economic numbers from the 2018–19 MYEFO with a summary of key data in the tables below.

The 2018–19 MYEFO shows an improvement in the forecast fiscal position since the 2018–19 Budget. The underlying cash balance (UCB) (the Government’s preferred measure of surplus and deficit) has improved from a deficit of $14.5 billion to a deficit of $5.2 billion for the 2018–19 fiscal year, and is expected to be in surplus in 2019–20, increasing each year over the forward estimates period. Net debt is expected to be higher in 2018–19 at $351.9 billion, compared to $349.9 billion in the Budget. On an accrual basis, the net operating balance has shifted from a deficit of $2.4 billion in 2018–19 in the Budget, to a surplus of $4.9 billion in the MYEFO.

Government receipts are anticipated to be $8.4 billion higher in 2018–19 than previously forecast, and government payments are expected to be $1.2 billion lower. On an accrual basis, government revenues are anticipated to be $7.2 billion higher in 2018–19 than in the Budget, and expenses are expected to be $0.2 billion lower.

The following figure shows that this improvement in the fiscal position is driven primarily by better-than-expected underlying economic parameters (parameter variations) (such as better employment conditions reducing Government’s spending on social welfare), offset in part by policy decisions taken since the 2018–19 Budget.

Parameter variations are expected to improve the UCB by $11.2 billion in 2018–19, and a cumulative $31.3 billion over the budget forward estimates period. Policy decisions taken since the 2018–19 Budget are expected to offset this UCB improvement by $1.9 billion in 2018–19, and a cumulative $16.3 billion over the forward estimates period.

Figure: impact of underlying parameter and policy variations since the 2018–19 Budget

Impact of underlying parameter and policy variations since the 2018–19 Budget

Note: UCB = underlying cash balance

Source: Parliamentary Library, using 2018–19 MYEFO data.

 Economic parameters

There are a few significant changes to the Government’s assumed economic parameters since the 2018–19 Budget, which predominately affect the current (2018–19) fiscal year. These include:

  • Better-than-anticipated employment data, with employment growth 0.25 per cent higher in 2018–19 than forecast in the Budget, and the unemployment rate 0.25 per cent lower. Wage growth is 0.25 per cent lower—at 2.5 per cent a year in 2018–19—but is expected to rebound to 3.5 per cent growth by 2020–21.

  • Terms of trade are substantially better than forecast in the Budget with growth at 1.25 per cent for 2018–19, compared to a fall of 5.25 per cent in the Budget. Contributing to this higher terms of trade are better-than-anticipated non-farm commodity prices in 2018–19. However, the recovery is expected to be temporary, with the terms of trade expected to fall in 2019–20, consistent with Budget forecasts.

  • Growth in nominal GDP is expected to be higher than forecast in 2018–19 at 4.75 per cent, compared to 3.75 per cent in the Budget. Growth in real GDP is anticipated to be slightly lower at 2.75 per cent, compared to 3 per cent in the Budget.

Policy decision

The 2018–19 MYEFO includes a number of significant policy decisions taken since the 2018-19 Budget, many of which have been announced or implemented since the Budget.

These policy decisions are anticipated to decrease revenue by $3.1 billion and increase expenditure by $15.1 billion over the forward estimates period. The net impact of these decisions reduces the fiscal balance by $18.2 billion over the forward estimates period.

The most significant component of this $18.2 billion comprises policy decisions that the Government has taken but not yet announced. These unannounced decisions are expected to reduce revenues by $8.9 billion over the forward estimates period and increase expenditure by $1.4 billion. The net impact reduces the fiscal balance by $10.3 billion. The 2018–19 MYEFO does not include any information about these measures. Some in the media have speculated that these decisions may include up to $9 billion in additional tax cuts to be announced prior to the federal election in 2019.

Table 1: fiscal parameter summary, various indicators

  Actual Estimates Projections
    2017–18 2018–19 2018–19 2018–19 2019–20 2020–21 2021–22
 Fiscal indicator Unit FBO* Budget MYEFO Δ† MYEFO MYEFO MYEFO
Receipts $b 446.9 473.7 482.1 8.4 506.0 526.4 554.8
Payments $b 452.7 484.6 483.4 –1.2 497.4 513.9 535.8
Net future fund earnings $b 4.3 3.6 3.9 0.3 n/a n/a n/a
Underlying Cash Balance (UCB) $b –10.1 –14.5 –5.2 9.3 4.1 12.5 19.0
Revenue $b 456.3 486.1 493.3 7.2 514.5 538.2 568.3
Expenses $b 460.3 488.6 488.4 –0.2 504.4 517.8 538.6
Net Operating Balance (NOB) $b –4.0 –2.4 4.9 7.4 10.1 20.4 29.8
Net Debt $b 342.0 349.9 351.9 2.1 343.4 329.9 312.6
Receipts $b real 456.3 473.7 482.1 8.4 494.9 502.5 517.3
Payments $b real 462.2 484.6 483.4 –1.2 486.4 490.6 499.6
Revenue $b real 465.9 486.1 493.3 7.2 503.2 513.8 529.9
Expense $b real 470.0 488.6 488.4 –0.2 493.3 494.3 502.2
Net Debt $b real 349.1 349.9 351.9 2.1 335.9 315.0 291.4
Receipts % GDP 24.2 24.9 24.9 0.0 25.2 25.2 25.5
Payments % GDP 24.5 25.4 24.9 –0.5 24.8 24.6 24.6
UCB % GDP –0.5 -0.8 -0.3 0.5 0.2 0.6 0.9
Revenue % GDP 24.8 25.5 25.5 - 25.7 25.8 26.1
Expenses % GDP 25.0 25.7 25.2 –0.5 25.2 24.9 24.7
NOB % GDP –0.2 -0.1 0.3 0.4 0.5 1.0 1.4
Net Debt % GDP 18.6 18.4 18.2 –0.2 17.1 15.8 14.3
Receipts % Δ p.a. real‡ – 3.8 5.7  – 2.7 1.5 2.9
Payments % Δ p.a. real – 4.8 4.6  – 0.6 0.9 1.8
Revenue % Δ p.a. real – 4.3 5.9 – 2.0 2.1 3.1
Expenses % Δ p.a. real – 4.0 3.9 – 1.0 0.2 1.6
Net Debt % Δ p.a. real – 0.2 0.8  – –4.6 –6.2 –7.5

Notes:

* FBO = Final Budget Outcome
† Δ = change
‡ Estimates of real fiscal indicators are based on 2018–19 dollars with the consumer price index as the deflator, and have been calculated by the Parliamentary Library. Estimates may vary to 2018-19 MYEFO due to rounding.

Sources: J Frydenberg (Treasurer) and M Cormann (Minister for Finance), Mid-Year Economic and Fiscal Outlook 2018–19 (2018–19 MYEFO), 17 December 2018; Australian Government, Budget strategy and outlook: budget paper no. 1: 2018–19 (2018–19 Budget), 8 May 2018, J Frydenberg (Treasurer) and M Cormann (Minister for Finance and the Public Service), Final Budget Outcome 2017-18, September 2018.

 

Table 2: domestic economic parameter summary, various indicators

Actual Estimates Projections
    2017–18 2018–19 2018–19 2018–19 2019–20 2020–21 2021–22
Domestic economic indicator Unit FBO* Budget MYEFO Δ† MYEFO MYEFO MYEFO
Nominal GDP % Δ 4.7 3.75 4.75 1.00 3.5 4.25 4.25
Real GDP % Δ 2.8 3 2.75 –0.25 3 3 3
Consumer price index % Δ 2.1 2.25 2 –0.25 2.25 2.5 2.5
Wage price index % Δ 2.1 2.75 2.5 –0.25 3 3.5 3.5
Participation rate % 65.6 65.5 65.5 – 65.5 – –
Employment % Δ 2.7 1.5 1.75 0.25 1.75 1.5 1.5
Unemployment rate % 5.4 5.25 5 –0.25 5 5 5
Terms of trade % Δ 1.9 –5.25 1.25 6.50 –6 – –

Notes:

* FBO = Final Budget Outcome
† Δ = change
Sources: 2018–19 MYEFO; 2018–19 Budget, 2017-18 FBO.

Table 3: international economic parameter summary, percentage change to gross domestic product

  Estimates Alternative sources
International economic indicators (calendar year 2018) Budget MYEFO IMF OECD Oxford Economics The Economist
Australia     3.2 3.1 2.9 3.2
China 6.5 6.5 6.6 6.6 6.6 6.6
India 7.5 7.5 7.3 7.5 7.4 7.4
Japan 1.25 0.75 1.1 0.9 0.8 1.1
United States 2.75 2.75 2.9 2.9 2.9 2.9
Euro area 2 2 2 1.9 1.9 2.1

Notes:
* FBO = Final Budget Outcome
† figures based on calendar years

Sources: International Monetary Fund (IMF) and Organisation for Economic Co-operation and Development (OECD) public datasets; Oxford Economics and Economist Intelligence Unit (The Economist) subscription databases.

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