The mid-year economic and fiscal update (MYEFO) released yesterday demonstrates that Australians can be confident about their economic future. We have the first current account surplus in 40 years, the lowest welfare dependency in 30 years, the biggest tax cuts in 20 years, and the budget is in balance for the first time in 11 years. And in the last quarter, household disposable incomes have seen their fastest increase in a decade as a result of tax cuts.
Record amounts are being invested in schools, hospitals, aged care and disability support, while Australia has maintained its AAA credit rating.
At a time of significant global and domestic headwinds, the Australian economy has again demonstrated its remarkable resilience.
The drought has already taken a quarter of a percentage point off GDP growth and reduced farm output by around 14 per cent over the past two years. Global trade tensions have weighed heavily on consumer and business sentiment, with the IMF downgrading global economic growth four times in the past 12 months. It is in this context that yesterday’s budget update also downgraded the growth forecasts for our major trading partners, including the US, China and India.
In the light of these developments, there are three key takeouts from the latest numbers in the update.
First, the government is living within its means, paying down debt without increasing taxes. Surpluses over the forward estimates total $23.5 billion and build to 1 per cent of GDP by 2026-27. With a forecast surplus of $5 billion in 2019-20, it is a $53.5 billion turnaround on the deficit that we inherited in 2013.
Gross debt peaked in 2017-18 and net debt will fall from 19.5 per cent of GDP this year to just 1.8 per cent by the end of the decade. The nation’s interest bill on its debt burden also falls from $19 billion last year to $14.5 billion in 2022-23.
Over the forward estimates in cumulative terms, this amounts to $13.5 billion that no longer needs to be spent on interest payments and is freed up for other priorities across the economy.
This stronger fiscal position is achieved with a tax-to-GDP ratio of 23.1 per cent, and this falls to 22.9 per cent at the end of the forwards. Real growth in spending is 1.3 per cent per annum on average over the forwards, reflecting more Australians in work. This is a significant reduction on the unsustainable level of spending growth we inherited from Labor, which was around 4 per cent a year.
Spending as a proportion of GDP is at 24.5 per cent this year, below the 30-year average. Our pathway to surplus has been steady and consistent, not relying on overly optimistic commodity prices. We have under-promised and over-delivered.
Our last three final budget outcomes have been $37 billion better off than the budget forecast. Consistent with our prudent approach, we have kept the iron ore price assumption at US$55 per tonne by the end of the June quarter 2020, despite the current spot price being around US$85 per tonne. Metallurgical and thermal coal price assumptions have been reduced to US$134 per tonne and US$64 per tonne respectively.
This is having an effect on nominal GDP growth, which is forecast to be 3.25 per cent in 2019-20 and 2.25 per cent in 2020-21. This affects revenue forecasts, which have been revised in the update.
Second, the update demonstrates that the Australian economy continues to grow. This year growth is forecast to be 2.25 per cent, increasing to 2.75 per cent next year. Next year the Australian economy is expected to grow faster than any nation in the G7, and faster than the OECD average of 1.6 per cent.
Growth is being driven by a number of factors.
Public final demand is forecast to grow to 4.75 per cent this year, which is up from budget, and mining investment is forecast to grow for the first time in seven years.
Household consumption, while lower than budget, is still forecast to grow by 1.75 per cent in 2019-20.
Export growth remains strong, supported by new free trade agreements and increased demand for our services exports, which is forecast to increase by 5.5 per cent in 2019-20.
The labour market remains resilient with employment growth forecast to be 1.75 per cent in 2019-20 and the participation rate around historic highs of 66 per cent, upgraded from 65.5 per cent at budget.
While wage growth and inflation have both been revised downwards, wages are forecast to increase at 2.5 per cent this year and next, which is above the forecast for the rate of inflation.
Third, with the government’s economic plan delivering continued economic growth and a stronger budget position, the update demonstrates we have the capacity and flexibility to invest in the areas that the public needs most.
It confirms that since the budget, we have made policy decisions to provide an additional $8.3 billion over the forward estimates, including $2.4 billion in 2019-20. This includes $4.2 billion in accelerated infrastructure projects over the forward estimates, which is part of our $100 billion 10-year infrastructure pipeline.
There is also additional funding for drought support and additional funding for aged care.
In the words of the IMF’s most recent statement on Australia last week, our policies on tax, infrastructure and support for small and medium-sized businesses make our fiscal settings ‘‘appropriately expansionary” for 2019-20.
As we go forward, we will continue to maintain a disciplined and responsible approach to managing the nation’s finances. We will not be panicked into reckless spending.
With the budget back under control, our fiscal strategy now focuses on paying down Labor’s debt with sustainable surpluses over the cycle, keeping taxes low and under our self-imposed cap, and targeting spending to boost productivity, workforce participation and guaranteeing the essential services that people need and rely upon.
In our 29th consecutive year of economic growth, Australians can be confident about their economic future.
Josh Frydenberg is the federal Treasurer.