Economic Strategy

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By Michael Knox

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Chief Economist and Director of Strategy

Date posted:

01 May 2017, 9:50 AM

We take a 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, their estimates are widely used by rating agencies.

The Australian Government has a spending problem. Back in 2007, immediately before the Great Financial Crisis, the Australian Government was spending a total of 34.3% of GDP. The Government of the day, led by Kevin Rudd, decided to expand spending to provide a short-term emergency stimulus to the Australian economy. Spending then rose by 3.6% of GDP to a total of 37.9% of GDP. When the crisis was over, spending then began to fall. By 2012, it had declined to 36.7% of GDP. This was still 2.7% higher than the level in 2007.

The problem was that spending got stuck at that level and didn't fall any further. The levels of expenditure for 2016 and the estimates for 2017 and 2018 are shown in Figure 1 below. We can see that in 2016, the Australian government spending was 37.3% of GDP. This is actually 0.5% higher than in 2012. It is also 2.9% higher than the level in 2007. This increase in spending explains all of the budget deficit in 2016 of 2.7% of GDP.

The IMF has a pretty optimistic outlook for the Australian budget for the next couple of years. They think that in 2017, government spending will fall to 36.8% of GDP. This will still be 0.1% of GDP higher than in 2012 and 2.5% higher than in 2007. The result of this restraint on spending reduces the budget deficit to 2.2% of GDP.

In 2018, the total of government spending declines to 36.2%. This is finally 0.5% lower than in 2012. It is still 1.9% higher than 2007. Still, the budget deficit should decline to 1.3% of GDP.

Eventually, the IMF sees spending stabilise at around 35.4% of GDP. This finally happens in 2020. This level of government spending will still be 1.1% of GDP higher than in 2007. Still, with estimated revenue in 2020 at 35.6% of GDP, this level of spending is enough to generate a wafer-thin surplus of 0.12% of GDP.

The difficulty that 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 almost forever.

Economic Outlook

The IMF has a reasonably optimistic outlook for the Australian budget deficit, and it also has an optimistic outlook for the Australian economy. After growth of just under 2.5% in GDP in 2016, the IMF has GDP accelerating to 3.1% in 2017. This improvement results from an increase in exports. Australia is rapidly becoming one of the world's larges exporters of liquefied natural gas. This is leading us to an improved trade balance which has recently moved into a small surplus. It is also resulting in a reduced current account deficit which has been recently moving into a smaller deficit. 

This improvement in exports is the reason for the improvement in growth in 2017. The IMF believes that Australian growth will then stabilise at 3% of GDP in 2018 and 2.9% of GDP in 2019. Growth then declines slightly to 2.8% of GDP in 2020 and again in 2021. The IMF suggests that this healthy growth of GDP eventually leads to Australian unemployment levels declining to 4.9% in 2020. This is generally around the level regarded as full employment.

Conclusion

The International Monetary Fund has built a reputation as an unbiased forecaster. The IMF has a pretty optimistic outlook for the Australian budget for the next couple of years. They believe that the Australian budget deficit will decline from 2.7% of GDP in calendar 2016 to 2.2% of GDP in 2017 and 1.3% of GDP in 2018.

This improvement of the budget deficit is primarily because of the introduction of some modest discipline in Australian government spending. Those who have looked at the record since 2007 know that this modest level of discipline has been a long time coming.

More information

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