Aussie budget moves into technical surplus, reshaping bond market expectations

In March the Commonwealth budget recorded a technical surplus, albeit it remained in clear deficit on a seasonally-adjusted basis. Along similar lines, the NSW budget deficit almost disappeared in March, underscoring the point that bond supply from both the Commonwealth and the States will be a lot less than investors had been expecting, as Coolabah Capital has repeatedly argued. Since late 2020 we've asserted that Commonwealth and state budget deficit projections were overly pessimistic, and would surprise very materially on the upside, which would be a technical positive for semi-government bond spreads.

The latest monthly data that Coolabah assesses show that the Commonwealth and NSW governments should announce substantial downward revisions to their forecast budget deficits for 2020-21. 

While the annual budget shortfalls are still enormous because they capture the brunt of the pandemic, the rapid turnaround in the budget positions has been remarkable, albeit in line with our expectations. 

On Coolabah's seasonal adjustment, the Commonwealth budget has more than halved from about $20bn per month late last year to about $9bn per month early this year (the budget was actually marginally in the black in March in unadjusted terms). 

Similarly, the New South Wales budget has improved from an average monthly shortfall of about $1.5bn per month in late 2020 in seasonally adjusted terms to about $0.8bn in recent months (the budget was almost in balance in March with a seasonally adjusted deficit of about $0.2bn). This good news should continue into next financial year, which points to a substantial reduction in bond issuance for the government bond market.    

The Commonwealth budget is due on 11 May and should show a substantial improvement in the nation’s finances, something that has been clear for some time in our tracking of monthly budget data. 

Late last year, the Commonwealth forecast an underlying cash deficit of $198bn in 2020-21. On our seasonal adjustment, data for March that were released today show that the budget in the financial year to date is tracking about $30-40bn better than expected and the deficit for the year as a whole could print around $150-155bn. 

This improvement will carry over into 2021-22, where there should also be an additional company tax windfall from the significantly higher-than-forecast price of iron ore. That said, the Commonwealth could allocate some of the improvement to spend more on defence. In terms of the improvement in 2020-21 to date, the substantially better outcome reflects both stronger revenue and weaker payments relative to the Commonwealth’s forecast profile.

The NSW budget will likely be delivered in June and the state’s finances are also substantially better than the government had expected in its half-year budget update. 

Coolabah's seasonal adjustment of the monthly budget data show that the cash deficit is tracking around $5-6bn better in 2020-21 to date than the run rate implied by a simple interpolation of the annual estimate of a deficit of $21.6bn. Based on recent trends, the deficit for the year as a whole could end up at about $13-15bn. 

The improvement to date mainly reflects lower-than-expected payments, mainly non-wage payments, including infrastructure investment (however, we assume that the underspend on investment will carry over to next financial year). Revenue is also tracking below expectations, even as residential stamp duty reached a new all-time high in March. National GST revenue continues to track about $3-4bn above the Commonwealth’s forecast for the financial year to March.  

See our proprietary internal charts below.

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