Australia’s federal budget – especially the federal budget deficit – was the main topic of discussion late last year, after the Morrison government rolled out record stimulus measures to protect the economy from the pandemic.
Out of a forecast surplus of around $ 5 billion, the government announced a project deficit of $ 213.7 billion for fiscal year 2021.
But with a V-shaped economic recovery and soaring commodity prices, UBS estimates that with a forecast deficit of $ 213.7 billion for FY21, the government may now be able to return to a surplus. from 2024/25.
The UBS team, led by economist George Tharenou, attributed the “main driver” of the fiscal fix to the strength of Australia’s economic rebound and a healthy job market.
Earlier this month, CBA economist Gareth Aird said the consistency of monthly beats in national employment figures had “surprised all the fraternity of the forecasts.”
In addition, Australia’s employment-to-population ratio has now rebounded to “near an all-time high,” UBS said.
More people at work means more people contributing tax revenue (income) and fewer people needing JobKeeper support (expenses).
“However, a stronger than expected global economy has contributed to much higher than expected commodity prices, especially iron ore,” UBS added.
Importantly, the current price above US $ 180 / t is about three times the government’s conservative forecast of a return to US $ 60 / t, which takes into account its federal budget assumptions.
As a result, “we believe higher prices should add at least $ 20 billion to the budget position (and more if they are held up front),” Tharenou said.
Budget deficit crystal ball
Along with strong employment data and the continued outperformance of iron ore, UBS noted that corporate profits have rebounded as asset prices (like real estate) are “booming”.
Thus, instead of the deficit forecast of 213.7 billion dollars that the government pronounced last October, analysts estimate that the real deficit for fiscal year 21 will be more of 163 billion dollars.
This kind of improvement indicates the government escaped with “limited structural scars” on the pandemic budget.
“Therefore, it is plausible that the budget forecasts a return to equilibrium in 24/25, with a cumulative improvement of around $ 200 billion across the profile,” UBS said.
With the government moving back to surplus by 2024/25, UBS said the current trend would translate into a “significant reduction” in its borrowing commitments in the bond market.
Right now, the RBA is buying about $ 5 billion in bonds per week as part of its quantitative easing program, to which it has committed until August.
Unless it declines, the central bank will eventually hold half of all Australian government bonds by the end of the year, UBS said.
But Tharenou doesn’t expect the RBA to completely suspend QE. On the contrary, a tap is on the cards which could see weekly bond purchases cut in half in August before stopping by the end of the year, he said.
He added that the argument to extend the RBA’s yield curve control program on three-year government bonds has “weakened significantly.”
“Nonetheless, the RBA is still likely to keep the cash rate above our forecast profile, at least until the end of 2022,” Tharenou said.