What the Mid Year Economic Outlook Means for NFPs

This article is by Commonwealth Bank economist James McIntyre is part of a regular series of articles by the Commonwealth Bank, who will be using their financial experts to provide news, insight and expert advice for Not for Profit organisations.

The Federal Government has released its Mid-Year Economic and Fiscal Outlook (MYEFO) of the nation’s Budget and despite the challenging fiscal position the Not for Profit sector looks to have received a boost.

The updated state of the nation’s fiscal affairs revealed that the budget deficit for 2010/11 has deteriorated to $37.1bn, nearly $15bn worse than the estimate made at the time the Budget was released in May 2011. Whilst large, $37.1bn is equivalent to 2.5% of GDP, and continues to compare exceptionally favourably internationally.

This is particularly in comparison to Europe where large budget deficits, some in the order of 10% of GDP (imagine an Australian budget deficit of $150bn?!), have ignited concerns about the sustainability of sovereign debt.

Despite the impacts of the European crisis on the budget, and economy, Treasurer Wayne Swan has kept the forecast for a surplus in 2012/13.

This has been done by shifting some expenditure forward (such as infrastructure spending to assist the weaker economy), and by cutting expenditures. Provided that the European debt crisis doesn’t derail the global economy, economic growth in the Australian economy is likely to pick up over the next year, and deliver the budget into surplus.

Whilst many sectors of the government spending had the knife taken to them, the MYEFO contained a major commitment for the Not for Profit sector.

Amidst the significant fiscal rectitude room was made in the budget to deliver $2.1bn in additional funding for the social and community sector to deliver on the Equal Remuneration Order that is expected to be delivered by Fair Work Australia.

As many in the Not for Profit sector would well know, Fair Work Australia is currently considering a pay equity claim on behalf of certain workers in the sector. Hearings by the full bench of Fair Work Australia are scheduled to conclude on 8 December 2011.

Confirmation that the Federal Government’s proportion of the additional costs of introducing equal pay will be forthcoming will put many in the sector’s minds at ease, given the constrained fiscal position.

However there are a number of not for profits that fund their operations through a combination of government funding and reserves, and income from philanthropy.

These members of the Not for Profit sector may still face adjustment issues when Fair Work Australia’s final outcome is known. Additional government funding may not meet all of the cost increase, particularly where reserves or philanthropic income fund wage costs.

Unfortunately, the weaker economic backdrop painted by the government in the MYEFO is not one that is conducive to the sector securing alternate sources of income to offset higher costs.

The expenditure cuts deliver the first outright reduction in federal government spending in over 40 years, and the largest reduction in real terms (once inflation is taken into account) since the late 1980s.

Some of the cuts to expenditure to lock in the 2012/13 surplus have been significant. Others reduce spending now, and also deliver major gains to the budget over coming decades as the population ages.

Both have been important to maintaining Australia’s standing in global credit markets. Shortly after the release of the MYEFO, the ratings agency Fitch upgraded Australia’s key credit rating to AAA. Only 15 other countries hold Fitch’s top rating, and it is the first time Australia has been rated AAA by all three major credit ratings agencies.  

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Disclaimer: Important Disclosures and analyst certifications regarding subject companies are in the Disclosure and Disclaimer Appendix of this document andatwww.research.commbank.com.au. This report is published, approved and distributed by Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945.