BDO’s response to the Pre-election Economic Outlook (PEFO)
23 May 2016
Last week Treasury released the Pre-election Economic Outlook (PEFO).
The PEFO provides updated information on the economic and fiscal outlook. The report takes into account all Government decisions made before the election was called, and all other circumstances that may have a material effect on the economic and fiscal outlook.
Given Australia’s economic and fiscal outlook is broadly unchanged since the 2016-17 Budget, PEFO did not delivery too many surprises.
The major budget parameter that has changed since the 2016-17 Budget is a $103 million reduction in the expected underlying 2015-16 cash balance because of lower than expected receipts from the Unclaimed Superannuation Monies. These amounts were expected to primarily come from unclaimed superannuation amounts from former temporary residents and small lost member accounts from super funds. This appears to be a significant error in relation to the 2015-16 Budget figures but there is no explanation of this error in the PEFO documentation.
As per the 2016-17 Budget, the deficit is projected to improve from $37.1 billion in 2016-17 to $5.9 billion in 2019-20 and then surplus in 2020-21. Budget improvement will depend on a number of parameters some of which have improved since the 2016-17 Budget, but others are still uncertain.
The improving parameters include:
- Falling Australian Dollar exchange rate since the Budget (however PEFO does not mention that this could easily reverse)
- Reduced official interest rate since the budget was formulated
- Employment growth expected to remain solid with unemployment rate expected to fall from current 5.75% to 5.5% in the June quarter
- Nominal GDP growth expected to increase from current 2.5% to 4.5% (however, the commentary in PEFO around this point does not give much support for this increase, in fact it points to low inflation and low wage growth being the reason for the current low growth and says if this low inflation and low wage growth continues it will have negative consequences for tax receipts).
The parameters that are still uncertain include:
- Commodity prices are volatile and could vary from the prices assumed in the 2016-17 Budget
- The rebalancing of the China economy is of particular significance to the budget and if there is a greater than expected slowdown in the Chinese economy it will be a key risk to Australia and the region
- Financial challenges in other economies, particularly the Euro zone Japan ,and a range of emerging economies, is also a concern for the Global economy
- The expected positive global response from consumers to lower oil and energy prices has not yet eventuated.
The 2016-17 budget figures and the future forecasts include the impact of all policy decision by Government including those that have not yet been passed by Parliament. These unlegislated policy decisions amount to $18 billion in underlying cash terms over the five years to 2019-20.
PEFO does not mention that the passing of many of these unlegislated policy decisions will be dependent on the composition of the Parliament after the election. There is of course no guarantee that the current Government will be returned and, even if it is, there is the real possibility that the Government will still not have control of the Senate. Therefore the passing of some of these measures still remains uncertain.