Australia's Debt and Economic Outlook

With the election looming and each party using a great deal of emotional rhetoric it’s difficult to decipher the policy making from the economic outlook. This week LJ Financial Group looks to sift through the political spin and give an insight into Australia’s debt and the effect this has on our economy.

With Election Day finally in sight, we are currently experiencing the longest period between an election announcement (January) and actual voting date in Australia’s history. One major point that has continued to surface throughout this period is the budget deficit, but more importantly how each party has indicated how they intend to bring it back to surplus.

What is a budget deficit & where are we now?

The Government Budget, in laymen’s terms, is an itemised balance sheet that shows the payments received by the government including items such as taxes and other levies and the payments made by the government such as purchases, etc. A budget surplus, put simply, occurs when the government receives more money than it spends. A deficit is the opposite. If you have been following the election at all this year you will know that at the moment we are in a deficit.

Australia recorded a Government Budget deficit equal to 3 percent of the country’s Gross  Domestic Product for the Fiscal year 2011/2012. This is by no means the lowest point over the last 10 years however it is moving towards that figure seen in June of 2010 of 4.30%.

So what does this mean for the Australian economy?

This increase is indicative of the economy as a whole however in isolation is not a major issue. It is more an indication rather than a cause of the economic slowdown both experienced here and in the developed world. The growth rate of Australia has been revised downwards with unemployment forecast to a level of 6.25% over the next 2 years. This is off the back of the contraction of the mining boom, continuing low consumer confidence figures along with the slow or stagnated recovery of some of the largest economies in the world. This has meant that the government has had to revise their predictions of a budget surplus by 2014-2015 with some economists predicting a budget deficit for up to 10 years.

This has caused a dramatic change in government spending but more importantly tax legislation. Regardless of your political persuasion there is an indication that there will be a “tightening of the belt” over the short to medium term. Australia in the last 12 months has seen an effective abolition of fringe benefits tax savings, which is hoped to save the Australian Government approximately $1.8 billion. In addition, an intended increase to the tobacco tax, reforms in superannuation tax and an increase bank levy, all of which are intended to increase the balance sheet by $700 million, is a good indication of the determination of the Australian government to move towards a budget surplus as quickly as possible. With both parties promising reductions in tax and increased social benefits be prepared for further policy changes to economic and tax legislation.

What does this mean for you?

What this means for the individual is that reviewing the government’s changing legislation and getting advice as to how this could affect you is paramount. Investing prudently is also important during these times of market uncertainty. It should not be to exit the market completely; as it is in this period of volatility where undervalued opportunities present themselves. This along with the changing tax laws means that being in an informed position and seeking the correct and measured advice will see you in a budget surplus long before most economists see the Federal Budget back in the black.