Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Commodity prices rescue 2019 Budget

It is budget time again in Australia, and the nation is heading for its first Federal Government surplus since 2008, mostly from good luck with China and commodities.

Here is a chart showing the Federal Government’s deficit and debt position since 1901. The upper section shows revenues (green line) and expenses (red). The middle section shows the resultant annual surpluses (green bars – look hard!) or deficits (red bars). The purple bars in the lower section show the level of Federal Government debt. All are expressed relative to total national output (GDP) each year.

Click to enlarge

A brief history of budgets

The Federal Government ran balanced budgets in the early years following Federation but it had very few functions prior to the introduction of Federal Government pensions in 1909. World Wars I & II changed all that, requiring massive war-time deficits and debt build-ups. These were finally brought under control by the 1950s and 1960s booms. The Government still ran small deficits (1-2% of GDP) but rising tax revenues from the booming economy were enough to pay for expanding services and nation-building projects, and still reduce the debt/GDP ratio down to low levels by the 1970s. The current level of debt relative to national output is the highest it has been since the late 1950s.

Producing a government surplus can be done in one of two ways: by cutting costs or increasing tax revenues, or sometimes both. Most of the time the surpluses have been a result of windfall revenue gains, mostly from fortuitous mining booms. The problem is that costs are controllable, but tax revenues depend on mining booms that are based on global commodities price cycles outside our control.

Only rarely have surpluses been achieved by cutting costs. This was the case with the 1930s surpluses. Australia did not follow Roosevelt’s big spending approach in the US. Instead we had to endure harsh ‘austerity’ cost-cutting imposed by London bankers. The government wasn’t able to borrow anyway after it defaulted on its debts in 1931. Arguably the austerity cuts prolonged the depression and stunted the recovery.

The only other period of surpluses produced by cost cutting was the four-year period from 1988 to 1991 by Hawke and Keating. Commodities prices and tax revenues were falling but they were able to produce surpluses by cutting costs by even more, resulting in the deep 1990-91 recession.

The Howard Government had two spells of surpluses – four years from 1998 to 2001, and then another five years from 2003 to 2007 (or six years if you count the 2007-08 year during which Rudd came to office, when boom-time mining revenues were still flowing in prior to the GFC). Both of these surplus spells were driven by windfall tax revenue gains – first from the 1990s ‘dot-com’ boom and the second from the 2003-08 mining boom. Government spending was also reducing during the whole period – from 25% of GDP in 1996 to 21.7% in 2007. But because most of the gains were from boom-time tax revenue rises, the windfall surpluses quickly disappeared when the booms ended.

If the Federal Government achieves a surplus in the current 2018-19 year it will be mainly thanks once again to fortuitous tax revenue gains from the mining boom, not because of cost management. In the past five years the population has grown by just 8%, but government spending has risen by an incredible 21%. By sheer luck the mining boom has increased revenues by 27% but windfall gains like these are not sustainable.

 

Ashley Owen is Chief Investment Officer at advisory firm Stanford Brown and The Lunar Group. He is also a Director of Third Link Investment Managers, a fund that supports Australian charities. This article is for general information purposes only and does not consider the circumstances of any individual.

 

  •   3 April 2019
  • 4
  •      
  •   
4 Comments
Warren Bird
April 02, 2019

I wouldn't put it quite that way, for a couple of reasons:

1) "rescue" is usually a term I'd use when something unusual takes place, unexpected or last minute. But as the chart shows, Australia has had a cycle that is connected to commodity prices since, well since Arthur Philip arrived. What we're seeing is a typical economic and fiscal cycle at play. And the fact that we've had a strong run in commodity prices is hardly a surprise.

2) the economy and the budget are far from being one pony shows. For example, as Luci Ellis from the RBA pointed out recently, personal income taxes have increased at a faster rate than usual, from a range of factors including increased compliance efforts by the ATO that has effectively increased the average rate of tax collected. Note that the RBA in its monetary policy statement recently mentioned slow "disposable income" growth as a factor, hinting that tax cuts would give a helpful leg up to consumer spending capacity. This increase in budget revenue has nothing to do with commodity prices.

As an aside, I think that the significant improvement in our fiscal position, from whatever source, puts to the sword the argument used by many in the franking credits debate that 'we can't afford to give those refunds'. I've argued before that I think that's wrong and now we have a budget bottom line to support what I've been saying. So let's just focus in the franking credit discussion on the validity of the policy.

Our fiscal position is nowhere near as dire as many folk would make it out to be.

Don Macca
April 03, 2019

Ashley's chart allows us to stand back, forget the trees & look at the whole forest. The impression i get is that Australia's fortune still mostly relies on being a quarry for the world. In particular Iron ore for China.

We need to expand our economy into other areas. We have outstanding companies in medicine, medical research, software .
Can we be reluctant about spending most of largesse on ourselves; instead we should build a future for our children.

Most of us (myself included) have been beating our own drum. We can pick holes in promises made by both Labor & the Coalition. Each one matching the other & then adding a little more. Let's stop beating our own drum.
We need to carefully consider our "Vote".

Warren Bird
April 05, 2019

Don, how do you get that from the chart? Ashley asserts it in his commentary, but the chart shows only government financing information and nothing about commodity prices, exports or anything that would support the contention that we are merely 'the quarry for the world'.

Donald Horne has so much to answer for!

TONY SMITH
April 05, 2019

the Libs are heading toward a real budget surplus, despite all their own goals that make them partially unelectable.
However the Labor budget reply points to more deficits if they are elected. They never raise the revenue anticipated but continue to spend anyway.
Labor only gets into government every decade or so and then want to spend up big to fund all their own priorities.

 

Leave a Comment:

RELATED ARTICLES

Avoiding destructive M&A and hype cycles in mining

Australia’s bounty: is it just diversified luck?

BHP v Rio v Fortescue: it's all about the iron ore price

banner

Most viewed in recent weeks

Building a lazy ETF portfolio in 2026

What are the best ways to build a simple portfolio from scratch? I’ve addressed this issue before but think it’s worth revisiting given markets and the world have since changed, throwing up new challenges and things to consider.

Get set for a bumpy 2026

At this time last year, I forecast that 2025 would likely be a positive year given strong economic prospects and disinflation. The outlook for this year is less clear cut and here is what investors should do.

Meg on SMSFs: First glimpse of revised Division 296 tax

Treasury has released draft legislation for a new version of the controversial $3 million super tax. It's a significant improvement on the original proposal but there are some stings in the tail.

Ray Dalio on 2025’s real story, Trump, and what’s next

The renowned investor says 2025’s real story wasn’t AI or US stocks but the shift away from American assets and a collapse in the value of money. And he outlines how to best position portfolios for what’s ahead.

10 fearless forecasts for 2026

The predictions include dividends will outstrip growth as a source of Australian equity returns, US market performance will be underwhelming, while US government bonds will beat gold.

13 million spare bedrooms: Rethinking Australia’s housing shortfall

We don’t have a housing shortage; we have housing misallocation. This explores why so many bedrooms go unused, what’s been tried before, and five things to unlock housing capacity – no new building required.

Latest Updates

Economy

Making sense of record high markets as the world catches fire

The post-World War Two economic system is unravelling, leading to huge shifts in currency, bond and commodity markets, yet stocks seem oblivious to the chaos. This looks to history as a guide for what’s next.

Australia’s generous housing subsidies face mounting political risk

Mark Carney has spoken of a rupture in the rules based system that has governed the world since 1945. That rupture means nations like Australia will need to boost defence spending and find savings elsewhere.

Shares

Finding yield on the ASX

With ASX dividend yields now below government bond yields, investors face an upside-down market where income is scarce, growth is muted, and careful selection of bond-like stocks has never mattered more.

Investment strategies

Digging for value among ASX miners

ASX miners are back in favour after playing second fiddle to banks for years. Is it too late to get in? Here are some thoughts on the large caps such as BHP and Rio, and the hot gold mining sector.

Gold

It’s economic reality, not fear-based momentum, driving gold higher

Most commentary on gold's recent record highs focus on it being the product of fear or speculative momentum. That's ignoring the deeper structural drivers at play. 

Investment strategies

Asia in 2026: Riding AI, reform and a shifting global order

Tariff turmoil tested Asia, but AI leadership, policy easing and reform momentum are restoring investor confidence and strengthening the region’s outlook for 2026. 

Investment strategies

Investors beware: Bull markets don’t last forever

New research explains why high valuations, low dividends and bullish sentiment rarely coexist with strong long-term returns after extended bull markets. 

Sponsors

Alliances

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.