The 2009-10 Mid-Year Economic and Fiscal Outlook (MYEFO) released today forecasts lower unemployment, higher growth, lower deficits and lower debt than expected at Budget, and underscores Australia's position as the strongest performing advanced economy in the world.
The improved economic outlook reflects the effectiveness of monetary and fiscal stimulus in Australia, and the stronger global recovery. Fiscal stimulus and low interest rates have bolstered confidence by more than expected and set a solid platform for recovery.
The Australian economy is now expected to grow by 1½ per cent in 2009-10 and 2¾ per cent in 2010-11 and the unemployment rate is forecast to peak at 6¾ per cent in the June quarter 2010.
Despite the improved outlook, the global recession has still had a marked effect on the Australian economy and challenges remain.
The economy is expected to continue to operate below capacity for some time and unemployment is still expected to rise. The decline in the terms of trade and reduced hours worked is expected to drag on domestic incomes, resulting in the weakest growth in nominal GDP in almost 50 years, and business investment and private demand are forecast to contract this financial year.
If not for the direct impact of the fiscal stimulus, Australia would have experienced a technical recession and the economy would have gone without growth for two consecutive years, in both 2008-09 and 2009-10.
The stronger economic outlook has resulted in increased tax revenues across the forward estimates. Notwithstanding this improvement, the impacts of the global recession still mean forecast tax receipts remain $170 billion lower than forecast at the time of the 2008-09 Budget.
Consistent with the Government's fiscal strategy, all of the increase in expected tax receipts since the 2009-10 Budget has been directed to improving the budget position.
In addition, saving decisions taken by the Government since the 2009-10 Budget more than offset the funding required for new spending measures across the forward estimates to 2012-13. This is the first time a Commonwealth Government has delivered a net saving to the Budget in a Mid-Year Economic and Fiscal Update since they began in 1997-98.
The Government has also made some minor adjustments to the fiscal stimulus measures, which in addition to delivering a small saving to the Budget, allow for additional flexibility in managing the demand for individual programs, provide for continued value for money and ensure an appropriate level of support is provided to the economy.
Because the impact of stronger economic activity will take time to be reflected in tax receipts, the forecast for the underlying cash deficit in 2009-10 is largely unchanged from Budget at $57.7 billion (4.7 per cent of GDP). However, in the three years from 2010-11 to 2012-13, the expected underlying cash deficit has improved by an average of 1 per cent of GDP each year.
Current projections are for the budget deficit to fall from 4.7 per cent of GDP in 2009-10, to 3.6 per cent of GDP in 2010-11, 2.3 per cent of GDP in 2011-12, and 1.1 per cent of GDP by 2012-13. The Government's fiscal strategy is expected to see the Budget return to surplus in 2015-16.
Net debt in Australia is now expected to peak at 10.0 per cent of GDP in 2013-14. This is lower than the 13.8 per cent peak forecast at Budget, and represents an improvement in net debt of around $50 billion compared to Budget.
The Government's strategy to return the Budget to surplus as the global economy recovers will ensure Australian Government net debt remains considerably lower than any major advanced economy. Net debt for the major advanced economies is expected to reach 93 per cent of GDP by 2014 and their budget deficits are expected to peak at 10 per cent of GDP in 2009.
Notwithstanding the improvement in the economic outlook, the economy is not yet growing at a rate sufficient to prevent further rises in unemployment, incomes remain under pressure, and a sustained recovery in the major advanced economies is not yet assured.
It remains appropriate for stimulus to be withdrawn gradually as private sector demand recovers, as it is designed to do. The impact of fiscal stimulus peaked in the June quarter, and its planned withdrawal will begin to detract from GDP from the March quarter 2010. Reflecting the withdrawal of stimulus, real spending is expected to contract in 2010-11, for the first time in 20 years.
The withdrawal of stimulus and the banking of increased tax receipts will see a substantial tightening of the fiscal stance over the forward estimates – in the order of 1 per cent of GDP a year. A more rapid withdrawal of fiscal stimulus than is planned would risk stalling the economy before a broad-based recovery in private demand has taken hold.
In moderating the downturn and supporting activity and employment during the global recession stimulus is expected to have long lasting benefits. Stimulus has resulted in less capital and skill destruction during the downturn and that has meant less permanent damage to the economy. Reflecting this, the revised medium-term projections in the MYEFO imply a smaller permanent output loss, with the level of real GDP around ½ per cent higher over the medium-term, than projected at Budget.
The MYEFO is available at http://www.budget.gov.au.