Australia: Strong fiscal position - AmpGFX

The Australian annual government budget revealed a strong increase in revenue from the mid-year update in December, reflecting stronger company profits and employment growth as commodity prices have lifted significantly, helping the bottom line, explains Greg Gibbs, Analyst at Amplifying Global FX Capital.

Key Quotes

“The government has both brought forward the date that it returns to surplus while cutting income taxes.”

“The budget is thought to be a good set up for the government to take to the next election.  By cutting income taxes, it also hopes to get support from two cross-bench Senators to pass company taxes that have been held up for some time.”

“An election is due early next year, although there is every chance the government calls the election this year if it senses that it is developing positive momentum in the polls.  The government has been trailing the Labor Party opposition since soon after the last election in 2016, but its position has improved in recent months.”

“It may seem surprising then that the AUD is weaker following the budget release.  Without developments in global markets, the AUD may have responded quite positively to this budget.”

“Perhaps the sizeable fall in the AUD after the budget reflects pent-up selling pressure that was waiting for the budget to be released (hoping for a post-budget bounce) before executing sell orders.”

“The AUD has weakened in recent weeks in line with a broadly stronger USD and weaker emerging-market assets.  Higher US interest rates and yields have pushed the AUD into a negative yield spread across its yield curve.”

“Nevertheless, the budget position in Australia is good news for the AUD.  Rating agencies immediately reaffirmed their AAA ratings.”

“The deficit is forecast at a modest 1.0% of GDP in the current fiscal year (2017/18), returning to a surplus in two years (2019/20), a year earlier than the mid-year economic update released in December.”

“This compares favourably internationally;  fiscal balances reported in the 2018 IMF Fiscal Monitor are as follows: USA (-3.7% of GDP), Euro Area (-1.0%), UK (-2.7), Japan (-3.3%), emerging Asia (-3.9% GDP), emerging Europe (-2.2%), Latin America (-6.4%).”

“Australian government debt as a share of GDP is now forecast to peak in the current fiscal year (2018/19) at 18.6% of GDP, falling steadily to 3.8% in 2028/29.  In December, net debt was forecast to rise over the next three years to 22.1%.”

“This compares favourably internationally, debt levels reported in the 2018 IMF Fiscal Monitor are as follows: Net government debt: USA (81.1%), Euro Area (70.3%), UK (80.6%), Japan (120.7%), G20 Emerging (45.2%). Gross government debt: emerging Asia (51.5%), emerging Europe (32.6%); Latin America (62.8%).”

“Furthermore, modest income tax cuts should tend to bolster consumer confidence.”