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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.


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.

Don Macca
April 04, 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 06, 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!

Warren Bird
April 03, 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.


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