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Australian Budget Update: 2008/09 Deficit Improves $A5b On May Estimate; Good For AUD, Bonds

Fuseworks Media
Fuseworks Media
Australian Budget Update: 2008/09 Deficit Improves $A5b On May Estimate; Good For AUD, Bonds

The Australian general government sector recorded an underlying cash deficit of $A27.1 billion (2.3% of GDP) for 2008-09. This outcome was $A5 billion better than expected at the time of the 2009-10 Budget. Recall those May estimates were -$A32.1 billion and -2.7% of GDP respectively.

Despite ample Government rhetoric in the press release (attached) this improvement is almost wholly due to "automatic stabilizers" where an improved economy (compared with May estimates) lowers spending (i.e. unemployment benefits) and boosts revenue intake (i.e. company tax receipts).

Importantly, note that the personal income tax take was not 'better than expected' despite the unemployment rate not rising as much as thought in May - this clearly reflects the collapse in aggregate household incomes along with hours worked. RBA take note.

While this is a better starting point for next years' May Budget, the challenge is to structurally shift the Budget back to balance in the coming years via targeted spending cuts and tax increases. This will be the real test for the Rudd/Swan Government: generating shrinking deficits beyond those generated by the 'automatic stabilisers'.

Nevertheless, the popular - and correct - conclusion to draw is there is a real possibility that the AOFM can scale back expected bond issuance (2009-10 program of $A60 billion) whereby the much-lauded $A300 billion debt target ($A 280 billion by 2012-13) may not be reached after all.

Bottom line: scant implications for monetary policy, slight upside for AUD, but more importantly this outcome should exert downward pressure on longer-dated bond yields. The potential for reduced supply lifts the attractiveness of holding ACGS. This supports our existing forecast of spread compression to the US 10yr to +165bp by year end (currently +189bp).

Also today: Article by Terry McCrann overnight (link here suggesting dual rate rises in November/December has pushed shorter yields higher and boosted the AUD. This "urgency" contrasts somewhat with the more cautious RBA Governor's opening remarks at yesterday's Senate Hearing, and is ahead of a key set of data tomorrow - critically August retail sales (mkt range -0.5% to +0.8%; mkt +0.5%, TD flat).

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