MYEFO: tax cuts on cards as Treasury update reveals expected surplus in 2019

The government is expected to announce a suite of tax cuts in the coming months, amid a strong economic report card.

Treasurer Josh Frydenberg at a press conference to announce the latest economic figures. Picture: Kym Smith

The government has set aside almost $10 billion to fund an expected pre-election cash splash on yet-to-be-announced tax cuts or projects, as the federal budget looks to bounce back into surplus backed by surging but temporary tax revenue.

The official growth prospects for the Australian economy have been slightly shaved back following unexpectedly soft conditions in the second half of 2018, as Treasury warns an escalating housing downturn could threaten the health of the economy.

The government’s Mid-Year Economic and Fiscal Outlook, released this morning, revealed the impact of slow wages growth and the surprise slowdown in economic growth during the September quarter, where GDP growth slipped to its slowest rate in two years.

However, in a sign of the current fiscal strength of the nation, the Morrison government stands ready to hand down this government’s first surplus in an early April federal budget, ahead of an expected May national election.

According to the updated MYEFO forecasts, the budget is expected to improve from a deficit of $5.2 billion this financial year, to a surplus of $4.1 billion next financial year — equal to 0.2 per cent of GDP by the 2019-20 financial year. By 2021-22, the surplus is expected to amount to almost 1 per cent of GDP.

The government is also expected to announce a suite of tax cuts in the lead up to next year’s election, with revenue measures over the forward estimates which are yet to be announced expected to see the government’s tax take decline by $2.5 billion in 2020, by $3.8bn in 2021, and by $3bn in 2022.

“Australia’s economy continues to perform well,” Treasurer Josh Frydenberg said. “Over the next four years, the cumulative estimated surplus will be nearly double the estimate in this year’s budget,” he said. “The combination of a growing economy with a record number of people in work is helping to increase revenues while decreasing expenditure.”

WEB _ NEWS Spending graphic

Over the four years from 2018-19, the budget will have posted $30.4 billion in surpluses.

The upbeat figures rely on the most recent soft economic data remaining a one-off, with mining investment forecast to rise again — for the first time in seven years — and growth in household consumption and non-mining business investment increasing.

Economists are concerned the falling housing market could throw a spanner in the works. National prices are down 6 per cent from their peak last year, with steeper falls in the Sydney and Melbourne markets, which analysts warn could scare consumers into shutting their wallets, filtering through to softer-than-expected economic growth over the short term.

A tightening of lending standard in the banking system after lenders were shamed for loose behaviour during the royal commission, has also unnerved economy who fear a possibility of a strained credit environment. Investment in housing construction is forecast to fall 4 per cent over 2019-20.

“On the downside, subdued household income growth, tighter-than-expected credit conditions and housing price falls could cause consumer spending and dwelling investment to be weaker than forecast,” the MYEFO outlook warned.

“Further, uncertainty around the global outlook could affect business confidence and investment.”

“There remains a risk that household spending could be affected by an unanticipated further tightening in financial conditions. This may be a result of greater risk aversion following the royal commission into misconduct in the banking, superannuation and financial services industry.”

But Treasury said low interest rates would continue to support the economy, notwithstanding a tightening of credit condition. “Rising growth in household incomes is expected to underpin an expansion in consumer spending,” it said.

According to the updated Treasury forecasts, GDP is now expected to grow 2.75 per cent this financial year, downwardly revised from the 3 per cent figure forecast at the May federal budget.

Treasury pointed to falling agricultural exports due to the drought in eastern and South Australia.

However, it is expected to rebound back to 3 per cent a year later and to continue at this rate for the following three years that account for the forward estimates.

The picture is rosier for unemployment forecasts, which are predicted to hold at the six-and-a-half year-low of 5 per cent over the forward estimates.

Following the unexpectedly steep decline in the jobless rate in recent months, Treasury is also expecting wages growth to increase at a faster rate over next two years, bumping up its forecasts by a quarter percentage point over 2018-19 and 2019-20, where salary increases are expected to reach 3 per cent, before then increasing further to 3.5 per cent over the rest of the forward estimates.

With more people in work, the extra tax revenue is feeding through to the budget bottom line for the government’s first surplus since the Howard government’s final budget for the 2008 financial year.

Since the federal budget was handed down in May, tax forecasts have been bumped up by an extra $8.3 billion for the current financial year thanks to surging corporate tax revenue and personal tax income. However, the revenue bonanza will slow over the following years to a total $12.4bn over the forward estimates.

The country’s gross debt has also peaked last financial year, and is forecast to decline from here on out. As a result of the improving budget position, net debt is expected to decline from 18.2 per cent of GDP this financial year, to just 1.5 per cent in 2028-29.

‘Surpluses that Australia needs to have’

Mr Frydenberg has turned to Paul Keating as an unlikely inspiration to sell his MYEFO.

The Treasurer mocked his opposition counterpart, Chris Bowen, in his MYEFO press conference and echoed the famous words of the former prime minister, and Mr Bowen’s hero, to sell his increased projected surpluses of more than $30 billion.

“Chris Bowen, my counterpart, he likes to mimic and to quote Paul Keating. Well, he should think about this,” he told reporters in Canberra. “These are the surpluses that Australia needs to have.”

Mr Keating, as treasurer under Bob Hawke, famously labelled the economic downturn of the late 1980s as “the recession we had to have.”

“Today’s update shows the Australian economy is on the right track giving us much to look forward to,” he said.

“The benefit of the strong economy under the Liberal and National Government and Prime Minister Scott Morrison is that more and improved services are being funded without increasing taxes.”

Finance Minister Mathias Cormann also harked back to a former Labor leader, Kim Beazley, to dismiss Labor’s criticism of MYEFO and wide-held expectations that they will win next year’s federal election.

“The last time I’ve seen the Labor Party this cocky about the upcoming election, and the last time I remember senior representatives of the press gallery declaring the election result five months out, was 2001 when Kim Beazley was opposition leader,” he said.

“Everybody knows how that turned out. And Mr Beazley was much more electable than Mr Shorten.”

Mr Frydenberg says today’s MYEFO is proof Scott Morrison’s economic plan is working as he unveils projections of a higher budget surplus than previously anticipated.

The Treasurer has announced that the surplus in his planned April budget will be $4.1bn and the deficit announced by the Prime Minister, when he was Treasurer, earlier this year has been more than halved to $5.2bn.

“These new MYEFO measures and initiatives are only possible because the Australian Government’s books are the best in over a decade,” he told reporters in Canberra today.

Mr Frydenberg said economic growth and a drop in unemployment was both increasing tax revenues and decreasing government spending.

“The combination of a growing economy with a record number of people in work is helping both sides of the ledger, increasing our revenues while also decreasing our expenditure,” he said.

“Previous decisions taken by the government to ensure payments are better targeted as well as steps taken to ensure the integrity of the tax system are also continuing to benefit the budget.

“Average annual real growth in payments over the five years from 2017/18 is expected to be 1.9 per cent. This is the lowest level for any government in 50 years.”

With Richard Ferguson