Westpac Budget Update

24 September 2009

Australian Federal budget update: Economic resilience moderates debt upswing • The Australian Government will upgrade their economic growth forecasts when they publish the Mid-Year Economic & Fiscal Outlook. The timing of the MYEFO release is not fixed, but it is typically before Christmas. • Our figuring suggests the stronger economic backdrop will result in a significantly improved Commonwealth Government budget position over the forecast period. By implication, the run-up in net debt and the stock of bonds outstanding will be less rapid than projected in May. • One important point of clarification: These estimates are all on a "no policy change" basis.

Table 1 Growth forecasts

2008/09 2009/10

2010/11

Real GDP Budget

0.00

-0.50

2.25

Westpac

1.00

1.30

3.70

Budget

5.75

-1.50

3.75

Westpac

6.40

-0.30

6.20

upgrade

+0.65

+1.20

+2.45

Budget

Revised

Change

2008/09

-32.1

-27.1

+5

2009/10

-57.6

-48.6

+9

2010/11

-57.1

-35.1

+22

2011/12

-44.5

-22.5

+22

2012/13

-28.2

-6.2

+22

Nominal GDP

Sources: Budget papers, Westpac Economics

• The ultimate improvement in the budget balance and the reduction in net debt is unlikely to be as great as these estimates. New policy measures will presumably be implemented over the forecast period, particularly with the Federal election to be held no later than 16 April 2011.

Table 2 • We estimate that the underlying cash budget balance in 2009/10 could be –$49bn rather than the –$58bn forecast in May. While the 2010/11 balance could be –$35bn, rather than the expected –$57bn. • The cumulative impact upon net debt over the forecast period is significant. Net debt would rise to $108bn in 2012/13, on our estimates. That is well below the $188bn net debt level forecast by the Government in May.

Underlying cash balance, $bn

Sources: Budget papers, Westpac Economics

• The Commonwealth Government bond stock outstanding in 2012/13 would be about $207bn, that compares with an estimated $280bn implied by the Budget numbers in May.

Commonwealth net debt

Upgrading Australia's economic growth forecasts The Australian economy has proven to be resilient so far in 2009 and the outlook is more upbeat than anticipated. Just as the consensus view and the RBA forecasts for Australia have been upgraded, so too will the Government need to raise their numbers. From a budget perspective, the focus is upon nominal GDP. For this exercise we assume that the Government moves their forecasts into line with the current Westpac numbers. See Table 1. We would note that the Budget forecasts from 2011/12 onwards were already upbeat, with real GDP growth at 4.50%. Nominal GDP growth for 2011/12 was 6.25%, rising to 6.75% in 2012/13. These upbeat numbers - which were criticised at the time by some - now seem quite plausible.

$bn

240 $bn 200

net debt - budget f'csts

160

net debt - lower starting point *

f'csts end 12/13

200 160

* assumes no new policy

120

240

120

80

80

40

40

0

0

-40

-40 Sources: Treasury, Westpac Economics

-80 78/79

-80 88/89

98/99

'08/09

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Australian Federal budget update

Bond stock outstanding: (May estimates)

Budget balance Given the improved economic growth numbers (see Table 1) we estimate a $9bn boost to the budget bottom line in 2009/10 and a $22bn boost in the 2010/11 year and the years following that (see Table 2). The likely improvement in the 2008/09 year is a matter of debate. We expect a figure of around $5bn but acknowledge that the number could be larger than that. If so, that is likely to have beneficial flow on effects to the out years. For a more detailed and technical discussion see comments below.

600

% of GDP

$bn annual, June yrs

500

* as implied by the May 2009 Budget

Commonwealth * states Total: % of GDP (rhs)

400

30

300

20

200 10

100

Net debt: $80bn lower by 2012/13 The improved outlook for the budget position has the potential to significantly moderate the rapid rise in net debt forecast in the May Budget. The key of course is the cumulative impact of lower annual budget deficits. Equally, to the extent that new policy measures are introduced in the May 2010 Budget and the extent to which the costs are ongoing, the impact on net debt by say 2012/13 can also be potentially significant. Our estimates imply that net debt will climb to about $108bn in 2012/13, rather than the Government's current forecast of $188bn (see chart on page 1). The $80bn improvement in net debt over the five years is simply the sum of the improved budget positions over these years (5+9+22+22+22). We also estimate that Commonwealth Government bonds outstanding in 2012/13 will be significantly less than implied by the current official forecasts - at about $207bn, rather than around $280bn. Note that the Budget papers did not provide point estimates beyond the 2009/10 year.

Sources: ABS, budget papers, Westpac Economics

0

0 1999

2002

2008

2011

$bn annual, June yrs

300

* Westpac estimates on a "no policy change" basis

as at May 2009

200 Sources: ABS, budget papers, Westpac Economics

100

100

0

0 1999

2002

2005

2008

2011

Bond stock: updated 500

% of GDP

$bn

With this in mind, we've assumed a $6bn deficit in the month of June. That allows for most of the grant payments to be made this year, with some slippage into next financial year. If true, that would put the underlying cash deficit in 2008/09 at $27bn, $5bn less than the May Budget forecast of $32bn. Clearly the ultimate outcome for 2008/09 has the potential to significantly impact the net debt and bond issuance profile over the years ahead - given the likelihood of a cumulative impact.

Andrew Hanlan, Senior Economist ph (61-2) 8254 9337

50

* Westpac estimates, improved budget position

40

400 Commonwealth * states Total: % of GDP (rhs)

300

30 20

200

Also, we've been advised that the improvement in the cash deficit to date "primarily reflects higher taxation receipts and the timing of grant payments". The detail shows that grants are running about $6.5bn below forecasts. If that proves to be just a timing issue then the ultimate improvement in the budget position will be considerably less than appears to be the case at present.

300

improved position *

200

annual, June yrs

The Government has published data for 11 of the 12 months. This reveals an underlying cash deficit so far this year of $21.1bn. That is $8.3bn less than the pro-rata figure of $29.4bn (ie, 11/12ths of the original full year's budget estimate of $32.1bn).

2005

Commonwealth: stock of bonds

2008/09 budget outcome The Commonwealth budget deficit in 2008/09 will be smaller than expected. How much smaller is unclear.

40

10

100 Sources: ABS, budget papers, Westpac Economics

0

0 1999

2002

2005

2008

2011

Note The fiscal balance so far in 2008/09 is a deficit of $12.3bn. That is a staggering $17.8bn less than the pro-rata estimate. So does that point to a much greater improvement in the budget position? We would caution that the fiscal balance estimate is an accounting concept - with revenues and expenditures measured on an "accrual" basis. While this concept has theoretical niceties, in that it purportedly provides a more accurate guide to the underlying budget position, it suffers in practice from the difficulty of generating accurate accrual estimates. The actual cash budget position is more relevant from a debt funding perspective in that the government will need to manage its cash flows.

Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.

2