Budget deficit projections tipped to improve

Budget deficit projections tipped to improve

The 2017-18 federal budget will likely see an improvement in forward deficit projections as a result of higher corporate tax collections, says AMP Capital.

In a note to investors, AMP Capital chief economist Shane Oliver said the federal budget, to be announced tonight, will likely forecast growth of 3 per cent real GDP and 4 per cent nominal GDP for the 2017-18 financial year.

Mr Oliver said deficit projections are likely to decrease and help to preserve the country’s AAA credit rating “at least for now”.

“We expect the 2017-18 deficit projection to come in around $27 billion (compared to $28.7 billion in the Mid-Year Economic and Fiscal Outlook) and that for 2018-19 to be around $19 billion (compared to $19.7 billion in the Mid-Year Economic and Fiscal Outlook) with the return to surplus remaining in 2020-21,” he said.

Mr Oliver also said the budget will likely include “a huge emphasis on infrastructure spending”. But he said it was “unclear” whether this would be a repackaging of last year’s promise of $50 billion in infrastructure spending until 2020 or additional net spending.

BondAdviser cautioned that the introduction of an infrastructure project pipeline in the new budget could have an impact on bond markets.

“Domestic inflation expectations are tipped to increase on the back of such an announcement with interest rate markets gradually pricing in a steeper yield curve over the past few weeks,” the company said.

“As a result, bond investors may be caught out, similar to the weeks following the US election back in November 2016.”

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