The Parliamentary Budget Office has released the report ‘2018-19 Budget: medium-term projections‘, which provides detailed projections of receipts and payments over the next decade to highlight the factors that explain the projected underlying cash balance and net debt position.

The purpose of the medium-term budget projection reports is to better understand the factors that are leading to changes in the budget aggregates over the medium term. The analysis in these reports supplement the budget forecast and projections contained in budget papers.

Key projections (Overview)

  • The underlying cash balance is projected by the Government to move from a deficit of 1.0 per cent of GDP in 2017‐18 to a surplus of 0.8 per cent of GDP by 2021‐22. Beyond the forward estimates, the PBO projects the surplus to reach 1.3 per cent of GDP by 2028‐29.
  • The main contribution to the projected improvement in the budget position comes from a rise in personal income tax receipts. With increasing wages, a larger proportion of income is taxed in higher income tax brackets resulting in a rise in the average tax rate. Personal income tax receipts are projected to increase by 1.3 per cent of GDP over the next decade, with the average tax rate projected to increase from 22.9 to 25.2 per cent. The projected increase in personal income tax receipts and the average tax rate occurs even with the cuts to personal income taxes resulting from the Government’s Personal Income Tax Plan. PBO distributional analysis highlights that the largest increases in average tax rates occur in the low‐ to middle‐income groups.
  • Further contributing to the improvement in the budget position is a projected fall in spending of 0.9 per cent of GDP over the next decade. While spending on the NDIS increases significantly over this period, it is more than offset by projected falls in spending as a share of GDP on a number of large payments including Family Tax Benefit, pharmaceutical benefits and the Disability Support Pension.
  • The BPO highlights that these projections reflect the fiscal position at the time of the 2018‐19 Budget. The recent government decision not to proceed with unlegislated reductions in company tax rates will improve the budget balance over the period 2018‐19 to 2026‐27 if not offset by other measures.

Three key areas of risk in the projections (Overview)

  • Risks that result from uncertainty in the underlying economic parameters. The projected surpluses over the medium term are predicated on above trend economic growth for much of the period and a return to close to trend wages growth by the end of the forward estimates period. The projections for the budget position have become more sensitive to these macroeconomic risks because of the effect of the Personal Income Tax Plan. Based on the 2018‐19 Budget, the PBO projects that tax receipts will not reach the Government’s tax‐to‐GDP cap of 23.9 per cent of GDP until 2027‐28, although this may now be achieved earlier with the recent company tax decision. Any weakness in tax receipts before the tax cap is reached will flow through directly to the budget bottom line.
  • Recent PBO analysis of the broad trends within the Commonwealth tax system highlighted specific downside risks to a number of consumption taxes. Ongoing weakness in the consumption tax base would lead receipts and the budget balance to be lower than PBO central projections.
  • The projections of spending assume no new spending initiatives beyond those contained in the budget estimates. The spending restraint seen over the past few years may be increasingly difficult to maintain with an improving budget outlook.

(Source: Parliamentary Budget Office | Full report | Budget 2018-19)

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