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Economics | May 29, 2020

Biggest monthly budget deficit Monthly budget statement The Monthly Financial Statements for April 2020 report the budget position against the expected monthly

profile for the 2019-20 financial year through to 30 April 2020, based on the 2019-20 Mid-Year Economic and Fiscal Outlook (MYEFO) estimates published in December 2019.

In the full twelve months to April the underlying cash balance was $35,770 million (1.5 per cent of GDP). The budget deficit for April is around $32 billion higher than estimated by the MYEFO documents.

The monthly Budget figures can provide insights on the broader economy and policy settings. If fiscal settings are tight, the Reserve Bank may allow easier monetary settings.

What does it all mean? In April the underlying budget deficit was $17.635 billion, the biggest monthly deficit since monthly records were

first maintained. The previous high was set in June 2012 at $14.4 billion. Over the full twelve months to April the deficit hit $35.77 billion. Only six months ago the budget was broadly balanced.

The April results largely reflect the $750 one-off stimulus payment as well as cash flow payments to businesses. The rolling annual budget deficit is expected to exceed 4.2 per cent of GDP in coming months, to hit the highest levels since the end of World War 2 – 74 years ago.

In response to COVID-19, the support and stimulus measures taken by the Federal Government have been backed by both sides of politics to assist businesses to stay in business, keep people in work and support vulnerable Australians.

What do the figures show? In the full twelve months to April 2020, the Budget deficit stood at $35,770 million (around 1.5 per cent of GDP).

Over the 10 months to April, tax refunds have totalled $33.4 billion, up $6.7 billion or 25.1 per cent on the same period a year ago.

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Economic Insights. Biggest monthly budget deficit

Smoothed revenues (twelve months to April) were up 3.2 per cent on a year ago – the slowest growth in almost four years. Smoothed expenses were up by 6.2 per cent, the fastest growth in 5 years.

Annual company tax collections fell by 1.5 per cent over the year – the first fall since the year to August 2016 – after recording double-digit annual results over 2017/18 and 2018/19. Net individual tax was up 0.3 per cent. But tax refunds were up 23.1 per cent on a year ago.

In terms of expenses, Social Security & Welfare spending was up 13.9 per cent, the fastest rate in almost 10½ years (since the global financial crisis). But public debt interest was actually down 2.0 per cent, just short of the biggest decline for over three years.

The Department of Finance noted: “The net operating balance for the year to 30 April 2020 was a deficit of $28,855 million, which is $26,699 million higher than the 2019-20 MYEFO profile deficit of $2,156 million. The difference results from lower than expected revenue and higher expenses.”

In terms of the underlying cash balance, “The underlying cash balance for the financial year to 30 April 2020 was a deficit of $39,995 million, which is $32,392 million higher than the 2019-20 MYEFO profile deficit of $7,602 million.”

Receipts: “Total receipts were $20,491 million lower than the 2019-20 MYEFO profile elating to lower taxation receipts ($19,801 million), driven by below profile collections across both income and indirect taxes.”

Payments: “Total payments were $12,015 million lower than the 2019-20 MYEFO profile primarily reflecting the Australian Government’s response to COVID-19 including the following key decisions: o Boosting cash flow for employers o Economic stimulus payments – a one-off $750 stimulus payment to pensioners, social security,

veteran and other income support recipients and eligible concession card holders o National Medical Stockpile – Purchase of Masks, Other Personal Protective Equipment and

Pharmaceuticals o National partnership agreement on a joint COVID-19 public health response o Partnership with private health sector to ensure viability and capacity during the COVID-19

response.”

Federal Treasury and the Department of Finance had previously expected (at MYEFO in December 2019) an underlying surplus of $5.0 billion for 2019/20.

In terms of the fiscal balance the Department of Finance noted: “The fiscal balance for the year to 30 April 2020 was a deficit of $31,138 million, which is $26,548 million higher than the 2019-20 MYEFO profile deficit of $4,590 million. The difference results from lower than expected revenue, higher expenses and lower net capital investment.”

Receipts from the Goods and Services Tax stood at a record $67,801 million in the twelve months to April, up 2.0 per cent on a year ago. (Full year receipts forecast at $67,230 million).

Actual GST receipts for the 10 months to April stood at $58,238 million, above the Budget ‘profile’ of $57,233 million.

What is the importance of the economic data? The Department of Finance releases the Government Financial Statements (Niemeyer Statement) almost every

month. The statement allows investors to track the current Budget position and provides insights into the

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Economic Insights. Biggest monthly budget deficit

effectiveness of fiscal policy.

What are the implications for investors? The Government will rack up significant deficits over the next few years, boosting debt levels. How will the debt be

paid? As the US Federal Reserve Governor recently stressed, the most important thing is to first get through the crisis.

But Australia had low levels of debt before the crisis, so we are starting from a low base. And the best way to get back in surplus and pay off debts is to get the economy growing at the fastest sustainable rate. At the same time the Government will need to be disciplined on future spending – that is, once the crisis period has been navigated.

The interesting thing is that GST revenues continue to rise – hitting record highs. Consumers have continued to spend, but have replaced in-store purchases with on-line spending.

It’s also important to remember that tax refunds are nearly $7 billion higher than a year ago, and are providing further support for Aussie workers and Aussie retailers.

Craig James, Chief Economist, CommSec Twitter: @CommSec