Australian Government Mid-Year Budget Update, 17 Dec 2013

Yesterdays Mid-year Economic and Financial Outlook(MYEFO) shows a major deterioration in the Government’s fiscal position over the four years of the forward estimates. This reflects both forecasts for lower revenues and increased expenditure compared to the August Update (PEFO) released by Treasury prior to the Federal election.

·    Government expects a deficit of $47.0bn in 2013-14 (up from $30.1bn in PEFO). A surplus is no longer forecast for 2016-17 (PEFO expected $4.2bn). Instead, Government now expects a $17.7bn deficit.

·       Forecasts for real GDP growth have been downgraded for 2014-15. Real GDP growth now expected to be below trend at 2.5% in both 2013-14 and 2014-15. The downgrade reflect lower consumption and business investment, with the latter forecast to be a drag on overall growth in both years. Growth will return to the long-term trend rate of 3% in 2015-16 and 2016-17 (no change from PEFO).The unemployment rate is expected to stay worse for longer, at 6.25% from 2014-15 onwards.

·     The nominal GDP growth outlook has also been downgraded over the next four years. The outlook for company profits has been downgraded substantially. Consequently company tax expectations have been revised down by $180mn in 2013-14 and $7.1bn across the four years to 2016-17. The wages growth outlook is also weaker.

·      Among the funding announcements today, all business programs associated with the forthcoming repeal of the Minerals Resources Rent Tax and the Carbon Emissions Reduction Schemes have been wound back. This includes abolition of CEFC and various energy market compensation measures.

·     MYEFO confirms the Government’s intention to proceed with the Paid Parental Leave Scheme and to impose a 1.5% levy on large companies to partially fund this measure. The $50mn increase to the popular Export Markets Development Grants program will also go ahead as announced. An additional $8.2bn will be provided over the next 6 years for major infrastructure projects, mainly large roads.

·     Funding cuts announced today that may affect business were relatively small, with some programs shaved and only a small number of programs axed entirely. The Trade Training Centres program will cease, saving $987mn. The Manufacturing Technology Innovation Centre will cease, saving $10mn.

MYEFO headlines

Today the Treasurer released the 2013-14 Mid-Year Economic and Fiscal Outlook (MYEFO).  The update highlights a substantial deterioration in the budget balance since the Treasury’s Pre-Election Economic and Fiscal Outlook (PEFO) in August. The cash deficit will now widen to $47.0 bn in 2013-14 (from $30.1 bn) and $33.9 bn (from $24 bn) in 2014-15. If no further policy changes were made, the Government expects this worsening outlook would mean deficits throughout the forward estimates period ($24 bn for 2015-16 and $17.7 bn for 2016-17). This frames the size of the savings task needed for the next full Budget in May, particularly with the Commission of Audit due to report on a wide of savings options by the end of March 2014.

MYEFO Economic Outlook

Economic expectations in the MYEFO are more pessimistic than in the PEFO in August. Real GDP growth expectations for 2013-14 is unchanged from PEFO at a below-trend 2.5%, but GDP growth in 2014-15 has been revised down by ½ a percentage point to 2.5%. This is mainly due to a weaker outlook for household consumption and non-dwelling construction activity (particularly mining investment). Real GDP growth is then forecast to return to trend levels of around 3% p.a. from 2015-16, as mining exports pick up.

More importantly for Government revenues, nominal GDP forecasts were revised down significantly in MYEFO throughout the forecast period. In particular, slower growth in output and employment means individual income tax will be down $20.4bn over four years and company tax will be down by $180mn in 2013-14 and $7.1bn across the four years to 2016-17. Wages growth outlook is also weaker over the next four years.

In the labour market, Treasury now expects national employment to grow by just 0.75% in 2013-14 (previously 1%) and 1.5% in 2014-15. The unemployment rate will climb to 6.25% in in 2014-15 and then remain there for several years. Workforce participation is assumed to be 0.5 percentage points lower than it was in the August PEFO, reflecting the strong trend for people to drop out of the workforce instead of actively seeking work. Either way (unemployed or not participating), these people will be out of work, without an income and without means to spend or invest. This helps to explain the weaker consumption outlook for households (just 2% growth expected in 2013-14 and 2.75% growth in 2014-15).

Table 1: key economic forecasts, MYEFO 2013-14

Policy changes that will affect industry and businesses

The Treasurer announced around 20 major spending changes in today’s MYEFO. Many of these relate to the forthcoming repeal of the carbon emissions tax and the minerals resources rent tax. This will include programs such as the clean technology program, the steel transformation plan and the clean energy skills package (saving a combined total of $5.3bn).

Outside of these two key policy areas, the following funding changes may have an impact on your business. Many of these changes were previously announced as election commitments.

·         Export Market Development Grants funding will increase by $50mn over four years, as announced prior to the election.

·         The Automotive Transformation Scheme will be cut by $500mn over four years, as flagged prior to the Federal election.

·         The Industry Innovation Precincts program will be cut by $26mn over 4 years. $10mn will be saved by discontinuing the Manufacturing Technology Innovation Centre.

·         The National Workforce Development Fund for high technology manufacturing will not proceed, saving $35.6mn in 2 years.

·         Trades Training Centres will cease, saving $986mn over five years. These supported entry-level trades training in schools.

·         Building Stronger Communities Fund ($528mn) and community infrastructure grants ($45mn) will not proceed, mainly affecting smaller regional projects. These will be partly replaced by a new community development fund ($342mn over 4 years).

·         Increase in personal insolvency fees from 1 Jan 2014, worth $25mn over 4 years.

·         The $10m Digital Business Kits program is being retained, but one of the ten kits will not proceed, saving $0.5m over four years.

·         New NBN-enabled business models will not proceed, saving $1.3mn.

·         Australian Research Council funding worth $103mn over four years will be redirected to other (mainly medical) research programs. This will reduce ARC funding available to non-medical academic research projects. ARC Centres of Excellence will also receive $10mn less in funding over four years.

·         Australian Building and Construction Commission re-established. Funding confirmed for the re-establishment of this body, at a cost of $35mn over four years.

·         The Experience + Jobs Bonus program for unemployed people (worth $11.1mn over four years) and the Mature Age Participation program (worth $10.7mn over two years) will cease, as will Tasmanian forestry workers assistance ($2.4mn). These will be replaced with a Job Commitment Bonus for the long-term unemployed (worth $157mn over the next five years), separate Relocation Assistance ($16.6mn over five years) and a Seniors Employment Incentive program ($197.5mn over five years).

·         Delayed investment in the Murray-Darling Basin water use and infrastructure program, taking $551mn beyond the Budget estimates.

·         LaTrobe Valley economic diversification program cut by $9.6mn over 6 years.

Further detail on MYEFO

See: www.budget.gov.au/2013-14/content/myefo/html/index.htm