NO.074

2002-03 MID-YEAR ECONOMIC AND FISCAL OUTLOOK

The 2002-03 Mid-Year Economic and Fiscal Outlook (MYEFO) released today, demonstrates

the continued resilience of the Australian economy despite unfavourable international

conditions and the impact of severe drought.

The forecast for economic growth in 2002-03 has been revised down to 3 per

cent from 3¾ per cent, largely reflecting the expected effects of the

drought on the economy. Non-farm sectors of the economy are expected to continue

to grow solidly.

Despite the forecast slowing in economic growth, the fiscal outlook remains

consistent with the Government’s fiscal strategy and is largely unchanged from

Budget. The underlying cash surpluses projected for this and future years emphasise

Australia’s sound fiscal outlook. This outlook compares very favourably with

the significant deficits being recorded in other OECD countries.

An underlying cash surplus of $2.1 billion is anticipated in 2002-03, the

same as at Budget. A slight downward revision to expected tax receipts is offset

by a slight fall in cash expenses.

Policy measures announced since the 2002-03 Budget include: support for Australian

victims of the Bali terrorist attacks and their immediate families; enhancements

to Australia’s security following the Bali attacks; an immunisation programme

against the Meningococcal C virus; and the Medical Indemnity Insurance Assistance

Package.

The MYEFO makes provision for further Exceptional Circumstances assistance

of $327 million over 3 years. In addition, previously announced measures including:

Interim Support, Farmhand and Exceptional Circumstances amount to $12 million

over 3 years. The Prime Minister will announce additional measures totalling

approximately $4 million in new expenses today.

The increase in cash expenses of these measures has been offset through favourable

parameter and other variations, in particular, decreased budget balancing assistance

to the States ($170 million) arising from GST collections slightly stronger

than forecast, and lower unemployment benefits ($150 million) arising from lower

than forecast unemployment outcomes.

Expected cash tax receipts have fallen only slightly from Budget, even after

factoring in the expected impact of slower economic growth. Taxation collections

have held up overall although the composition has changed. Forecast income tax

receipts from wage and salary earners have been revised downwards, while anticipated

company and other individuals taxation receipts have been revised upwards.

In accrual terms, the fiscal balance is expected to record a small deficit

in 2002-03, before returning to surplus in 2003-04. The divergence between the

fiscal and cash forecasts results from timing differences between when revenues

and expenses are recognised and when they are recorded in cash terms. For example,

superannuation expenses in 2002-03 are expected to be higher than cash payments.

While GDP growth for 2002-03 has been revised down to 3 per cent, non-farm

GDP is unchanged from Budget, and forecast to grow by 3¾ per cent. Domestic

demand is forecast to increase by 4¾ per cent in 2002-03, underpinned

by solid consumption growth and a strong pick up in business investment. However,

net exports are expected to subtract 1¾ percentage points from growth,

with the substantial downward revision since Budget largely reflecting the expected

effects of the drought on farm production and incomes, and the weaker global

environment.

Employment growth is forecast to be 1¾ per cent in 2002-03 in year

average terms and the unemployment rate is forecast to decline through the year

to around 6 per cent in the June quarter 2003 in line with the Budget forecasts.

The Consumer Price Index is forecast to increase by about 2¾ per cent

in 2002-03 in year-average terms with inflation pressures remaining subdued.

The initial forecast for 2003-04 is for economic growth to rebound to 4 per

cent. This forecast assumes a return to average seasonal conditions in rural

Australia and stronger world growth. Non-farm GDP growth is expected to be a

little slower than in 2002-03 reflecting the expected slowdown in dwelling construction.

There are, however, substantial risks around the outlook and a weaker outcome

is possible if the dry conditions persist or if global economic conditions deteriorate

further.

27 November 2002

Contact: Niki Savva

02 6277 7340

The 2002-03 Mid-Year Economic and Fiscal Outlook can be accessed at http://www.budget.gov.au.