Update of Economic and Fiscal Outlook

I am today releasing an update of the Treasury’s economic outlook for 1998-99 and the most recent fiscal outlook prepared by Treasury and the Department of Finance and Administration.

Treasury’s economic forecasts for 1998-99 show that the Australian economy continues to record solid growth and low inflation in the face of the sharp slowdown in the Asian region and a highly uncertain international environment.

Recent data which confirm the positive performance of the Australian economy include the strong growth in retail trade for July; strong employment growth (2.2 per cent over the year to July) and the high level of job vacancies; high levels of non-residential building approvals and work in progress, and, in particular, the very successful diversification of export sales away from the troubled Asian markets. This diversification contributed to the strong growth in exports in the June quarter.

The international economy, however, has weakened more than forecast in the May Budget. Financial instability in Russia and South America is compounding the uncertainty arising from the downturn in Asia and the weakness in the Japanese economy.

The weaker than expected international economy and volatile financial markets, and the nature of reporting, has been reflected in low measures of business and consumer confidence since the Budget. The impact of confidence on domestic economic activity was highlighted as a key uncertainty at Budget time.

Nevertheless the strong increase in business investment intentions shown in last week’s Private New Capital Expenditure Survey is an encouraging indicator that businesses are continuing to recognise the strong domestic economic fundamentals in deciding their investment plans. While the current international environment might affect the realisation ratio, the outlook for business investment nevertheless remains positive. Overall, the impact of the very volatile international environment on domestic confidence is likely to result in growth in business investment and private consumption in 1998-99 slightly lower than that expected at Budget time. There will be some offsets to this, such as stronger than expected growth in public final demand.

Australia’s very sound fundamentals will continue to support activity. On balance, Treasury estimates that economic growth in 1998-99 is expected to be around 2- per cent compared with the Budget forecast of 3 per cent growth.

Employment will continue to grow over the year at 1 per cent - slightly lower growth than the earlier 1- per cent forecast - with the result that unemployment is now expected to be closer to 8 per cent by the June quarter 1999 rather than the 7- per cent forecast. The forecasts for inflation and the current account deficit are unchanged from the Budget.

Projections for the period from 1999-2000 to 2001-02 remain the same since out-year projections are always based on long-run average growth rates, i.e. there are no forecasts beyond 1998-99.

Turning to the fiscal outlook, on 10 August 1998 I announced a preliminary budget outcome of a $1.2 billion underlying surplus for 1997-98 ($2.3 billion better than forecast at Budget time). This result means the Government has fulfilled its commitment to restore the budget to surplus a year ahead of schedule.

The latest budget estimates prepared by the Treasury and the Department of Finance and Administration (see attached table) show an underlying surplus again in 1998-99, with increasing surpluses projected over the next few years.

Despite the softer economic outlook stemming from international developments, the underlying budget surplus of $2.6 billion for 1998-99 is broadly consistent with that expected at the time of the 1998-99 Budget. This reflects stronger revenues as a result of the flow through of the better than expected revenue outcome in 1997-98. It also reflects additional expected capital gains tax revenue associated with the disposal of shares following the recent AMP demutualisation.

The stronger revenues received in 1997-98 improve the starting point for 1998-99 and all the following years. Attachment B factors in the cost of the Government’s policy for "A New Tax System" and all policy decisions taken since the 1998-99 Budget. It shows the maintenance of the prudent medium term fiscal strategy. The projections show continuing underlying budget surpluses beyond 1998-99.

The updated estimates also allow for some changes in the proposed method and timing of the sale of the Commonwealth’s remaining equity in Telstra, as well as more recent estimates of its market value.

A Pre-Election Economic and Fiscal Outlook report will be released by the Secretaries to the Departments of Treasury and Finance and Administration by 10 September, in accordance with the requirements of the Charter of Budget Honesty Act 1998.

2 September 1998
CANBERRA