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'Without increasing taxes'

By Michael Knox - posted Monday, 8 April 2019


The period since December 2015 has had a dramatic rise in Australian export commodity prices. Back in December 2015 the commodity price index in $US terms,stood at 68.6. By March 2019, this index of export prices had risen to 112.4. That is an increase of 63.8% in $US terms in a little over three years. The increase in the Australian dollar terms over the same period is a slightly higher 67.8%.

These higher commodity prices allow higher nominal growth in GDP and higher tax receipts by the government fromcommodity exporting firms. This increasing tax revenue generates an improvement in the underlying cash balance. We can see the underlying cash balance in Figure 3. In 2018-19, the cash balance is only $4.2billion in deficit. This moves to a surplus of $7.1 billion in 2019-20 and $11 billion in 2020-21. Further surpluses are projected in the following years.

Figure 3: Budget aggregates

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SOURCE: Statement 3: Fiscal Strategy and Outlook – Table 1 - Page 3-5

This improvement in the underlying cash balance is shown most dramatically in Figure 4. Here we can see the underlying cash balance rising as a percentage of GDP. Even though this budget provides significant increasesin spending, the increase in revenue growth is greater. Year by year, the budget surplus becomes stronger and stronger.

Figure 4: Underlying cash balance projected to 2029-30

SOURCE: Statement 3: Fiscal Strategy and Outlook – Chart 2 - Page 3-11

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Where the money goes

In Figure 5 below, we see expenditure outlined in Budget Paper No.1: Budget Strategy and Outlook 2019-20; Statement 5, Expenses and Net Capital Investment. This Budget proposes to spend a total of $500.9 billion. The largest section of spending by far remains Social Security and Welfare. This will consume $180 billion or 36% of total spending. Next comes Other Purposes. What you ask, is Other Purposes? This is the servicing of Australia's sovereign debt. It is the money we pay in interest for the national credit card. Spending here at $98 billion is bigger than every other sector of spending with the exception of one. This will consume 19.6% of budget expenditure.

Figure 5: Estimates of Australian General Government Expenses by Function

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This article was first published by Morgans.

Disclaimer

The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual’s relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so. Those acting upon such information without advice do so entirely at their own risk.

This report was prepared as private communication to clients of Morgans and is not intended for public circulation, publication or for use by any third party. The contents of this report may not be reproduced in whole or in part without the prior written consent of Morgans. While this report is based on information from sources which Morgans believes are reliable, its accuracy and completeness cannot be guaranteed. Any opinions expressed reflect Morgans judgement at this date and are subject to change. Morgans is under no obligation to provide revised assessments in the event of changed circumstances. This report does not constitute an offer or invitation to purchase any securities and should not be relied upon in connection with any contract or commitment whatsoever.



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About the Author

Michael Knox is Chief Economist and Director of Strategy at Morgans.

Other articles by this Author

All articles by Michael Knox

Creative Commons LicenseThis work is licensed under a Creative Commons License.

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