The magic ingredients behind Josh Frydenberg's budget surplus

The first budget surplus in more than a decade is being built upon a handful of tax measures, underspends and fiscal sleights of hand that would make a magician proud.

Treasurer Josh Frydenberg used his budget speech to declare that the nation's finances were already back in the black, even though confirmation of the first surplus since 2007-08 will not be officially known until September next year.

Treasurer Josh Frydenberg has used some tricks to reach a surplus in his first budget.Credit: Alex Ellinghausen

It's a surplus that comes despite downgrades to economic forecasts, including wages growth, and continuing concerns about the state of the global economy.

Across total revenue of $505 billion, the $7.1 billion surplus promised by the Treasurer represents a $46 billion improvement from the largest deficit recorded under the Abbott-Turnbull-Morrison governments.

Illustration: Matt GoldingCredit:

But getting to that $7.1 billion surplus is more than just soaring tax revenues - company tax alone will soar through $100 billion for the first time - and a clampdown on spending. A string of key measures are behind the Treasurer's prized number.

In last year's budget, the single largest saving outlined by then treasurer Scott Morrison was a $3.6 billion plan to target the movement of illicit tobacco.

The biggest element of the plan was a change to the point at which excise is imposed on tobacco in a move that would net the government almost all of the $3.6 billion in a single year.

The budget shows tobacco excise this year is $4.5 billion up on 2018-19, or effectively two-thirds of the total $7.1 billion surplus.

There's some payback in 2020-21 when tobacco excise collections are due to fall by $1.7 billion but it's the nicotine hit for the coming financial year that is most important to Mr Frydenberg's surplus ambitions.

Another key component of the surplus is the movement of $1.3 billion worth of grants to the nation's local councils out of the coming financial year and into 2018-19.

These grants, made every year, have been brought forward on the official grounds that they will "provide greater flexibility and support" to councils, particularly those affected by unexpected weather events.

A $1.3 billion movement of funds to councils increased the 2018-19 deficit but will improve the deficit the following year.

Apart from giving councils a small financial boost, the move reduces expenditure in the 2019-20 financial year - aiding Mr Frydenberg's quest for a surplus.

In last year's budget, Scott Morrison expected to spend in the 2019-20 financial year more than $20.7 billion on the National Disability Insurance Scheme. Mr Frydenberg's budget puts the figures for the coming year at closer to $17.5 billion.

Mr Morrison reckoned the scheme would cost $22.4 billion in 2020-21. Mr Frydenberg has $22.3 billion in his budget papers, suggesting a huge ramp up in expenditure that year but not in the year he hopes to deliver his surplus.

In these three distinct parts of the budget, the surplus of $7.1 billion is delivered.

But, like a magician with a bunch of flowers up its sleeve, there's more.

The budget shows a $28 billion drop-off in payments over the next four years due to the economy. The single largest part of this is a fall in GST that will be paid by the Commonwealth to the states.

In last year's budget, the government believed $80.6 billion in GST would be collected in 2021-22, but it now believes that year will deliver closer to $76.7 billion.

Even though falling GST is a sign of a softening economy, more than $10 billion in payments has been taken off the federal budget bottom line because Canberra won't have to pay the states and territories as much via GST grants.

For 2019-20, the drop in payments is worth close to $2 billion.

The government, as part of its "debt and deficit disaster" narrative since 2013, has talked up the way net debt is falling under its stewardship. Net debt is now due to be gone by 2030.

But gross debt is growing in absolute terms. It is due to reach a peak of $585 billion during the 2022-23 financial year as the government borrows money to feed into its infrastructure agenda.

Despite real debt going up, Mr Frydenberg has benefited from the fall in interest rates on government debt around the world.

At the mid-year update, the government believed it would be paying 2.5 per cent interest on its outstanding debt. When the budget was struck last year, the assumed interest rate was 2.8 per cent.

This week, it fell to 1.9 per cent.

That tumble in interest rates, despite more debt, translates into a lower interest bill. This year, the government's interest bill is $1.3 billion lower than what was expected in May 2018.

Throw in other movements (the government expects to spend $900 million less on the age pension in the coming year in part due to lower-than-forecast inflation and wages) and you have the makings of a surplus.