Australia’s fiscal position is the strongest that it’s been in decade, helped by a stronger global and domestic economy and firmer-than-expected prices for Australia’s key commodity exports.

According to the Treasury’s mid-year economic and fiscal outlook (MYEFO), Australia will record an underlying cash deficit of $5.2 billion in the current fiscal year, well below the $14.5 billion deficit projected just six months ago.

In 2019/20, Australia’s budget is expected to return to surplus for the first time since before the GFC with Treasury projecting an underlying cash balance of $4.1 billion, up from $2.2 billion in the May budget.

“After a decade of deficits, the budget is on track to return to surplus in 2019-20, with strong fiscal discipline ensuring these surpluses exceed 1 per cent of GDP in the medium term,” Treasury said.

“Over the four years from 2018-19, the cumulative underlying cash surplus is expected to be $30.4 billion, nearly double the 2018-19 Budget estimate.”

So the government is forecasting bigger budget surpluses in the coming years, helped by an expectation that recent strength in the Australian economy will continue over this period.

Are the numbers the real deal?

The question now is whether they’re realistic, especially as these numbers are those the budget projections are based upon.

At first glance they do appear to be somewhat optimistic, particularly the government’s expectation for wage growth — currently growing at 2.3 per cent per annum in the year to September — will accelerate to 3 per cent next financial year, slightly slower than the very optimistic 3.25 per cent pace seen in the May budget.

Even with the downward revision, that level is still far stronger than what many private sector economists currently expect given the evidence of other advanced in recent years where labour market conditions are significantly tighter than Australia.

The government also expects employment growth will slow in the coming years, although not by the same degree is saw six months ago.

Employment is now expected to grow by 1.75 per cent both in the current fiscal year and in 2019/20, up from 1.5 per cent projected in the May budget.

The government expects that will see Australia’s unemployment rate hold at its present level of 5 per cent over the next 18 months, again raising questions over the forecast for a sharp acceleration in wage growth expected over the same period.

Many private sector forecasters don’t see wage growth beginning to accelerate until unemployment falls to around 4.5 per cent, or lower. The RBA recently suggested that Australia’s full employment rate is now likely around this level.

Still a commodity economy

Along with unchanged forecasts for Australia’s key commodity export prices, Treasury sees nominal GDP growing by 4.75 per cent in the current fiscal year before slowing to 3.5 per cent in 2019/20.

Nominal GDP is the broadest measure of income in the Australian economy, with the upgrade to Treasury’s forecasts for the current fiscal year going someway to explaining why it sees a smaller budget deficit for 2018/19.

“The forecasts of the terms of trade and nominal GDP are sensitive to assumptions about commodity prices,” Treasury said.

“The iron ore spot price is assumed to be $US55 per tonne free-on-board (FOB) over the forecast period. This is consistent with the price assumption at Budget.

“Prices for thermal and metallurgical coal have been higher than expected since Budget. But in recent years there has been heightened volatility in world commodity prices and significant uncertainty around policy changes in China.

“In view of these factors, and current uncertainties in the global economic outlook, prudent assumptions for coal prices have been retained.”

Unlike the wage growth projections, these forecasts are realistic, leaving the potential for upside surprises in budget revenues.

The budget may be ok, but the terms of trade ain’t

The cautious commodity price forecasts help explain why treasury now sees a larger decline in Australia’s terms of trade next financial year.

“Volatility in commodity price movements remains a significant source of uncertainty in the outlook for nominal GDP,” Treasury said.

Excluding the impact of price movements over the budget forecast horizon, Treasury expects Australian real GDP will grow at 2.75 per cent in the current fiscal year, down from the 3 per cent growth forecast in the May budget.

That’s regarded by many economists as trend growth — the level where inflationary pressures and unemployment are expected to remain steady.

Treasury still sees GDP growth accelerating to 3 per cent in 2019/20, slightly above trend but below the levels forecast by the RBA.

The small uptick is largely underpinned by an expectation that household consumption — the largest part of the economy — will pickup from 2.5 per cent in the current fiscal year to 3 per cent in 2019/20.

That implies that continued strength in the labour market will be enough to offset the impact of expected further declines in Australia’s largest housing markets.

 

This article first appeared on Business Insider Australia, Australia’s most popular business news website. Read the original article. Follow Business Insider on Facebook or Twitter.