In this article, we look at the outlook for the Australian economy and the Australian budget deficit based on the April update of the International Monetary Fund Economic Outlook. The International Monetary Fund (IMF) has built a reputation as an unbiased forecaster. For this reason, its estimates are widely used by rating agencies.
The Australian Government has a spending problem. In 2007, immediately before the Great Financial Crisis, the Australian Government was spending a total of 34.3 per cent of GDP. The government of the day, led by Kevin Rudd, decided to expand spending to provide short-term emergency stimulus to the Australian economy. Spending then rose by 3.6pc of GDP to a total of 37.9pc of GDP. When the crisis was over, spending began to fall. By 2012, it had declined to 36.7pc of GDP. This was still 2.4pc higher than the level in 2007.
The problem was spending got stuck at that level and didn’t fall any further. In 2016, the Australian Government spending was 37.3pc of GDP. This is 0.5pc higher than in 2012. It is also 2.9pc higher than the level in 2007. This increase in spending explains the 2016 budget deficit of 2.7pc of GDP.
The IMF has a pretty optimistic outlook for the Australian budget over the next couple of years. It thinks that in 2017, government spending will fall to 36.8pc of GDP. This will still be 0.1pc of GDP higher than in 2012 and 2.5pc higher than in 2007. The result of this restraint on spending reduces the budget deficit to 2.2pc of GDP.
In 2018, the total of government spending declines to 36.2pc. This is finally 0.5pc lower than in 2012. It is still 1.9pc higher than in 2007. Still, the budget deficit should decline to 1.3pc of GDP.
Eventually, the IMF sees spending stabilising at around 35.4pc of GDP. This finally happens in 2020. This level of government spending will still be 1.1pc of GDP higher than in 2007. Still, with estimated revenue in 2020 at 35.6pc of GDP, this level of spending is enough to generate a wafer-thin surplus of 0.12pc of GDP.
The difficulty Australia has getting back to balancing its budget really demonstrates that when governments make a temporary increase in spending, the word ‘temporary’ means that spending can last for an extended period of time.
It’s worth also noting that the IMF does not just have a reasonably optimistic outlook for the Australian budget deficit, it also has an optimistic outlook for the Australian economy. After growth of just under 2.5pc in GDP in 2016, the IMF has GDP accelerating to 3.1pc in 2017. This improvement results from an increase in exports. Australia is rapidly becoming one of the world’s largest exporters of liquified natural gas.
This improvement in exports is the reason for the improvement in growth in 2017. The IMF believes that Australian growth will then stabilise at 3pc of GDP in 2018 and 2.9pc of GDP in 2019. The IMF suggests that this healthy growth of GDP eventually leads the Australian unemployment level to decline to 4.9pc in 2020. This is generally around the level regarded as full employment, which would be good for the Australian economy.
- Justin Still, Investment Adviser (Authorised Representative: 000279726), Morgans Financial Limited | ABN 49 010 669 726 | AFSL 235410
