Daily Commentary BY THE CURVE TEAM –

Government Finances in Focus

19th of December, 2017

Central banks took a back seat over the past 24 hours with government finances the focal point. In Australia yesterday, Treasurer Scott Morrison delivered his MYEFO, which drew a range of interesting comments from ratings agencies and economists. Meanwhile the Tax plan in the US remains in the headlines.

Australia’s government finances are in better shape than they were six months ago when the budget was first handed down. That was the key message from the Treasurer yesterday when he delivered his Mid Year Economic and Fiscal Outlook.

The budget deficit is now expected to be $5.8bln lower than forecasts in the May budget with the underlying cash deficit now expected to stand at $23.6bln. Larger than expected revenues and a tightening of the purse strings were touted as the main drivers of the result with the budget still expected to be back in surplus by 2020/21.

Despite the Treasurer’s optimism, the rating agencies were a little more circumspect. While ratings agency Moody’s said that “the modest changes in Australia’s fiscal and economic outlook maintain a credit-positive”, their outlook was a little more downbeat.

They reported in the post MYEFO statement that:

“Moody’s continues to see risks that fiscal deficits will be wider for longer than the government projects. This reflects our expectation for more subdued nominal GDP growth than over the past decade, a consequent dampening of revenue generation and a testing climate for spending restraint.”

While Moody’s expectations for growth were lower than the Government’s, they were both lower that the RBA’s most recent forecasts updates. You can see from today’s chart the RBA’s growth expectations outpace those of the government for the bulk of the forecast period. This could see a further upside surprise to the budget going forward if growth tracks more closely to the RBA than the government forecasts.

Meanwhile in the US the government’s tax cut plans continue to boost equity markets as the vote on the reconciled plan draw closer. Bond and equity markets are far less ebullient ahead of the final vote which could lead to a big move in some or all of the above markets once the vote is finalised. Time will tell on that one.

The data flow continues to wind down as we draw closer to the Holiday Break.

David Flanagan

Director - Interest Rate Markets