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CHART OF THE WEEK: CAN AUSTRALIA'S FEDERAL BUDGET AFFORD TO EASE THE SQUEEZE ON CONSUMERS?

03 April 2019

Bob Cunneen, Senior Economist and Portfolio Specialist

 

Budget balance as a % of nominal GDP

Source: Datastream, Australian Federal Budget, Congressional Budget Office.
 

Australia’s Federal Budget promises to deliver a surplus of $7.1 billion in the next financial year. This forecast budget surplus would equate to 0.4% of Australia’s nominal gross domestic product (GDP) (blue line). Given that the last budget surplus was way back in 2007/08, just when Apple launched the first iPhone, this has been a long time coming.

The Morrison Government has announced a range of stimulus measures. Modest income tax rebates, a small energy allowance for pensioners, increased infrastructure spending and small business asset allowances should help the Australian economy through the current slow growth phase. Given that many Australian consumers are feeling the squeeze from falling housing prices, high household debts and slow wages growth, then every extra dollar is particularly welcome.

Can Australia really afford these modest stimulus measures after a long period of running budget deficits? In the ideal world, government would run balanced budgets and low debt levels as a precaution for bad times. Yet in the current reality of slow economic growth, governments around the world have been compelled to provide stimulus. Australia is still the lucky country relative to the rest of the world. Notably Australia is a paragon of budget discipline compared to the US. The US budget deficit has already begun to increase with President Trump’s generous corporate and income tax cuts in 2017. The Congressional Budget Office (CBO) estimates that the US deficit will move from -4.2 % of GDP in 2018 to be -4.9 % GDP in 2021 (red line). So Australia has the capacity and scope to provide modest budget stimulus in these challenging times.

 

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