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Mid-year budget a mixed bag

Lachlan Maddock
— 1 minute read

The government has downgraded its wage and growth forecast and $2 billion has been wiped off the promised surplus.

Real GDP growth is forecast to be 2.25 in 2019-20, a downgrade of 0.5 per cent, before strengthening to 2.75 per cent in 2021. 

However, some aren’t so certain. 

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“That’s been the problem in Australia – we’ve been assuming a pick-up in growth and wages and inflation generally for several years now and it hasn’t come to pass,” AMP chief economist Shane Oliver told Investor Daily. 

“It keeps getting pushed out to next year. There is a risk here that when we get the next update in the May budget, the numbers might be a little bit weaker again.” 

The surplus of $7.1 billion forecast for this year has also been revised down to $5 billion. Mr Oliver says that the bulk of the downgrade has been due to drought assistance and infrastructure spending.

However, no new substantive spending was announced, and current infrastructure expenditures are unlikely to change the world. 

“The net stimulus this financial year is $2.2 billion dollars,” Mr Oliver told Investor Daily.

“That’s only 0.1 per cent of GDP… I think the Reserve Bank will look at this and think not much has changed.”

However, strong iron ore prices could buoy the Australian economy and add several billion dollars to the budget revenue. Fears of a Chinese economic slowdown – with a flow-on effect for iron ore – may be blown out of proportion, with Chinese authorities ramping up infrastructure spending to ward off economic woes brought on by the US-China trade war. 

The budget also notes an array of geopolitical risks to the Australian economy. 

“Fragilities in the financial sectors of a number of economies remain a concern, including in China, where the authorities are trying to balance financial deleveraging with a need to support a slowing economy,” the budget reads. 

“A disorderly Brexit continues to pose a downside risk to the outlook for the UK economy and Europe more broadly.”

However, the budget doesn’t take into account recent positive developments in the world of trade and geopolitics, including decreased anxiety about a no-deal Brexit and an easing of trade tensions between the US and China.

 

Mid-year budget a mixed bag
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