GDP SURGE POINTING TO SURPLUS SURPRISE

THERE’S now a very real chance that new treasurer Josh Frydenberg just might get to kick off by announcing the budget had actually got back into surplus for the first time in 10 years.

At the very worst, the 2017-18 budget outcome will now be a relatively trivial deficit of well less than $10 billion compared with the $18 billion deficit projected in the formal budget documents in May.

But whether the budget actually makes it back into the black for the 2017-18 year just ended, absent some form of shock global meltdown – like the global financial crisis in 2008 which brought the decadelong run of Peter Costello surpluses to an end – the current 2018-19 budget year will go into the black.

The big question is who will get to announce that, in May next year? Will it be Frydenberg either before or after the federal election? Or will it be an incoming Labor treasurer Chris Bowen.

That in turn poses the even bigger question: are we going to get a replay of 2007, with an incoming Labor government inheriting a budget in the black? And if so, what next after that – for the budget and even more importantly for the economy?

All this flows from yesterday’s better-thanexpected GDP growth figures.

Growth finally leapt above the critical 3 per cent level – to 3.4 per cent over the year to the June quarter (but only 2.9 per cent for the full year over the 2016-17 full year).

This was better than Treasury has forecast in the budget in May – 2.75 per cent for the full year; and better than the RBA had forecast just a month ago – also 2.75 per cent for the full year and 3 per cent over the year.

This provided an intriguing – and potentially extremely informative – backdrop to the sudden, and essentially unexplained, move by new prime minister Scott Morrison to abandon lifting the pension age from 67 to 70.

While Morrison gave no real explanation; he might have been effectively saying that with the budget heading back into surplus faster than projected, the government simply didn’t need the money.

In very basic terms, stronger economic growth than expected – and factored into the budget – means both stronger revenues than forecast in the budget and also lower payments. Result: a lower deficit.

Importantly, economic growth was running strongest in the latest six months, through June, with the economy growing at an annualised pace of close to 4 per cent.

That points to a potentially big – good news – budget surprise over what was expected in May.

Even so, in the 11 months to May the budget numbers were already running better than expected. The deficit for the 11 months was down to just $12 billion.

The month of June always knocks it down further – last year it cut $6 billion off the 11-month figure. A repeat this year would cut the full-year deficit to just $6 billion; but it’s entirely possible it could take the full-year bottom line into the black.

That in itself tells you that yesterday’s economic growth figures were not just a beautiful set of numbers in their own right, but certainly the most beautiful the former treasurer and now prime minister had seen in a very long time.

They could not have been more timely. They kick him – and his new treasurer – off to the best possible start. They give the duo a fighting chance to craft an election-winning economic and economic management story.

They also, more bluntly, give them the money (albeit, our money) to craft ‘good news’ policies and promises rather than (2014-style) nasties.

We’ve been struggling to get back to the 3 per cent growth level considered the marker between a healthy economy and one that’s paddling.

Well, it not only ‘got up’ to 3 per cent, it went rocketing past. Growth over the last year added to 3.4 per cent. And indeed, as noted, it was running at close to a 4 per cent annual rate over the most recent six months.

This is obviously a very good news story for the government and the (old is) new team at the top, the PM and treasurer Frydenberg.

The ‘good news’ will play out most potently in better budget numbers. The government will be able to ‘sell’ that good news over the next year into the election campaign and back it up by not having to have any fiscal nasties.

The Reserve Bank would also be pleased even though it didn’t predict the extent of the good news. It last forecast that growth would run at 3 per cent over the year, not the 3.4 per cent recorded.

But its underlying projection story has been consistently of growth picking up back to that allimportant 3 per cent figure and then strengthening further to 3.25 per cent.

On that basis Lowe has also said repeatedly that he expected the next move in the RBA’s official interest rate would be up. But equally, not soon – he wants to let the growth strengthen and see wages and inflation tick up a bit.

That remains the case. The only rate rises we will see over the next few months are those directly from the banks. But at least they will be smaller than the 25 points the RBA delivers.

BUT, ON THE OTHER HAND ...

That’s, broadly, the good news. It’s also, all history – taking us to the end of June.

As of now, in August, there are a lot of uncertainties hanging over both the domestic and global economies.

Where’s the US headed? What is really going on in China? Do we face a trade war? Do we face another GFC-style implosion? Can we sustain local growth with wages muted? Is the property market going to plunge?

My best guess, as of right now, is we will manage to stumble through.

IMPORTANTLY, ECONOMIC GROWTH WAS RUNNING STRONGEST IN THE LATEST SIX MONTHS, THROUGH JUNE, WITH THE ECONOMY GROWING AT AN ANNUALISED PACE OF CLOSE TO 4 PER CENT.