Australia expected to return to budget deficit by 2020/21 Australia expected to return to budget deficit by 2020/21

Australia expected to return to budget deficit by 2020/21
10 Jan 2018

Low productivity levels will result in lower wage growth, which will take its toll on tax receipts, according to the Parliamentary Budget Office.

Australia's return to budget surplus in 2020/21 will be short-lived, with weak revenue growth and rising spending likely to push the country back towards a deficit within a few years, according to a federal government report.

A Parliamentary Budget Office (PBO) analysis shows that the Treasury is relying on the economy regaining growth rates last seen in the 1980s and 1990s for its medium-term projection of making a permanent surplus of about 0.3% of GDP from 2020/21.

According to The Australian newspaper, the analysis assumes average productivity growth of 1.6%, which is the average of the last 30 years - but over the past decade, the average gain in output per hour worked has only been 1.35%.

Therefore, the PBO believes that productivity growth, which has been low in advanced economies since before the global financial crisis, is unlikely to improve. The International Monetary Fund links this productivity slowdown to declining commercial benefits from technology, an ageing population, weaker trade integration and limited gains in education.

The PBO notes that government policy could be expected to have an impact on the rate of future productivity growth. Its modelling shows that if productivity continues rising at the average rate of the past decade, tax receipts would be AUS$13 billion (US$10 billion) lower and spending would be AUS$4 billion (US$3.1 billion) higher by 2027-28.

Personal income tax revenue would drop by AUS$6.7 billion (US$5.1 billion) as a result of lower wages, while company taxes would fall by AUS$1.8 billion (US$1.4 billion).

Permanently weaker economic growth due to lower labour productivity growth would lead to a broadly balanced budget position by 2027-28, the PBO says, compared to a surplus of 0.3% of GDP under the current projections.

Low productivity levels will result in lower wage growth, which will take its toll on tax receipts, according to the Parliamentary Budget Office.

Australia's return to budget surplus in 2020/21 will be short-lived, with weak revenue growth and rising spending likely to push the country back towards a deficit within a few years, according to a federal government report.

A Parliamentary Budget Office (PBO) analysis shows that the Treasury is relying on the economy regaining growth rates last seen in the 1980s and 1990s for its medium-term projection of making a permanent surplus of about 0.3% of GDP from 2020/21.

According to The Australian newspaper, the analysis assumes average productivity growth of 1.6%, which is the average of the last 30 years - but over the past decade, the average gain in output per hour worked has only been 1.35%.

Therefore, the PBO believes that productivity growth, which has been low in advanced economies since before the global financial crisis, is unlikely to improve. The International Monetary Fund links this productivity slowdown to declining commercial benefits from technology, an ageing population, weaker trade integration and limited gains in education.

The PBO notes that government policy could be expected to have an impact on the rate of future productivity growth. Its modelling shows that if productivity continues rising at the average rate of the past decade, tax receipts would be AUS$13 billion (US$10 billion) lower and spending would be AUS$4 billion (US$3.1 billion) higher by 2027-28.

Personal income tax revenue would drop by AUS$6.7 billion (US$5.1 billion) as a result of lower wages, while company taxes would fall by AUS$1.8 billion (US$1.4 billion).

Permanently weaker economic growth due to lower labour productivity growth would lead to a broadly balanced budget position by 2027-28, the PBO says, compared to a surplus of 0.3% of GDP under the current projections.

Leave a Reply

All blog comments are checked prior to publishing