Analysis of 2014/15 Federal Budget
21 May 2014
The Independent Economics analysis of the 2014/15 Federal Budget focusses on three issues.
- The economic outlook: are brighter times ahead?
- The fiscal stance: a Budget emergency?
- The budget surplus: will we get there?
The Economic Outlook
Independent Economics expects that GDP growth will remain below trend at 2.7% for 2014/15 before rising above trend to 3.4% for 2015/16. Falling mining investment weighs on economic growth,
but this is gradually overcome by a household-led recovery that starts with housing investment and then spreads to household consumption. A continuation of low
interest rates, a housing shortage, and strengthened household balance sheets all support this recovery. This outlook for economic growth is similar
to that in the Reserve Bank's May Statement on Monetary Policy, but is more optimistic than the Budget forecasts of GDP growth of 2.5% and 3.0%
for the same two years. Over the next two years, unemployment of around 6% will contain inflation and keep monetary policy on hold. However,
during 2016/17 the economic recovery is expected to spread to the labour market, gradually pushing unemployment down and the cash rate up
from its current level of 2.5%.
The Fiscal Stance
The Budget projects that the underlying cash deficit will fall from $50bn in 2013/14 to only $3bn in 2017/18. Budget policy measures focus
more on the expenditure than the revenue side of the Budget. They kick in gradually to boost the Budget balance by $2bn in 2014/15 rising to
$18bn in 2017/18. This gradual approach is consistent with the view that there is no Budget emergency today, but there is an emerging emergency,
as population ageing puts upward pressure on spending and falling commodity prices put downward pressure on revenue.
The Budget surplus
The projected eroding away of the Budget deficit relies largely on a combination of the Budget policy measures and bracket creep. Without explicit tax cuts,
inflation gradually and automatically pushes taxpayers into higher tax brackets, pushing up average rates of tax. From 2012/13 to 2017/18,
bracket creep is estimated to improve the Budget balance by $23bn. Provided the Budget is passed in full by the Senate, a Budget
surplus could be achieved quicker than the Budget projection, if our stronger forecast for economic growth turns out to be correct.
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