The budget is projected to return to surplus in 2019-20, according to the budget update which shows this financial year’s deficit has blown out from less than A$30 billion to more than $40 billion.
Treasurer Joe Hockey said only the Coalition had “a plan on the table to get the budget back to surplus”, as the figures showed the deficit worsening across the forward estimates, driven by deteriorating revenue prospects.
After a brief delay, the update, already extensively briefed out by the government, was released against the backdrop of the Sydney hostage drama.
With the economy fragile, the government has not offset the revenue problem with fresh cuts, confining the savings to offsetting new spending on items since May, including national security and the military commitment in Iraq.
By far the biggest saving is a $3.7 billion cut to foreign aid over four years. In May, the budget projected a near balance ($2.8 billion deficit) by 2017-18; this has turned into a deficit of $11.5 billion in that year.
The outlook for real GDP growth has not changed since the budget. It is forecast to rise 2.5% this financial year increasing to near trend growth of 3% in 2015-16. Unemployment, currently 6.3% in November, is forecast to rise to 6.5% this financial year.
The budget has been shaken by the big fall in the terms of trade, including reductions in iron ore and coal prices and by weaker-than-expected wages growth.
“While the forecast for solid real GDP growth are unchanged, the prices we receive for our production have declined significantly,” the mid-year economic and fiscal outlook (MYEFO) says. Accordingly, nominal GDP growth, at 1.5%, is set to be weaker than forecast at budget time – and the weakest nominal GDP growth in over half a century.
Excluding changes in policy, total tax receipts have been revised down by $6.2 billion this financial year to $31.6 billion over the budget period. “This brings the total write down in tax receipts since the government was elected to over $70 billion.”
The total cost to the budget of Senate delays and negotiations is $10.6 billion over the forward estimates.
About $33.9 billion of measures that improve the budget position still have to be passed through an obstructive Senate. This includes more than $5 billion in measures that were policies of the Labor government.
The government insists that despite the deteriorating situation, the budget is on track to a credible surplus.
It is differentiating itself from Labor’s repeated failure to get to a promised surplus by saying it is keeping a much tighter hold on spending. Real spending growth is being held to 1% per year over the next four years.
The update says that “despite the deterioration in the fiscal outlook over the forward estimates, the medium-term outlook for the budget is considerably better than a year ago. Debt is now projected to be nearly $170 billion lower than it would have been by 2023-24 and to be falling.”
Since the budget, economic parameters have resulted in increased payments over the forward estimates in several areas:
Payments relating to Family Tax Benefits are set to rise by $3.2 billion, largely reflecting the impact of lower than expected wages growth, which drives up average payment rates and numbers of recipients;
Defence and other foreign spending is $1.5 billion higher, reflecting the dollar’s depreciation;
An increase of $966 million in income support payments is expected, reflecting updated recipient numbers and average payment rates.
The child care rebate and benefits payments, which are demand-driven, are estimated to rise by $2.4 billion over the budget period as a result of higher than estimated use of services and higher than expected fees. Support for schools has risen by $878 million over the budget period as a result of higher than expected enrolments in 2013.
The opposition said the update was “a clear indication that the Abbott government’s first budget continues to inflict significant damage on the Australian economy”. The unfair budget had damaged consumer and business confidence, Labor said.
The Business Council of Australia said MYEFO confirmed that Australia had deep structural budget challenges. The government had made the right call to continue economic growth by avoiding ad hoc tax decisions or spending cuts.
“The priority in balancing the budget is to control the growth in public spending. Major programs need to be redesigned in the near term according to a consistent policy framework, followed by a carefully managed transition plan which engages the community.”
The Australian Industry Group said MYEFO highlighted the economy’s increasing vulnerability to the global cycles of the resources sector: the economy “is in critical need of rebalancing”.
Listen to our special MYEFO podcast with Finance Minister Mathias Cormann here.