CHART: Australia's Worsening Budget Is More About Policy Than Economic Changes This Year


Australia’s budget deficit will be worse than expected, with the 2013-14 deficit blowing out to $47 billion in today’s MYEFO from August’s forecast of $30.1 billion, and a deficit of $17.7 billion by 2016/17, when Labor had promised a surplus.

UBS economist Scott Haslem now says Australia will face deficits “as far as the eye can see”, with the firm expecting Australia to remain in debt past 2023-24 unless government policy changes.

As expected, both sides of politics used the growing budget deficit to highlight opponents’ unreliability today.

But UBS notes that although policy changes account for a bulk of this year’s deterioration, 80% of the four-year, $68 billion deterioration reflects economic parameters, versus $14 billion for recent policy changes.

“Most of the deterioration over next 4 years reflects parameters, not new policy,” Haslem wrote.

“While the bulk of the widening in the current year reflects the $8.8bn RBA recap, the additional $68bn of deficits now projected over the next four years, reflects ‘parameter variations’ rather than new policy, in particular, a weaker growth outlook and less revenue per unit of GDP.”

From UBS’ note to clients:

In a separate note, AMP chief economist Shane Oliver commented that today’s pessimistic budget projections were driven largely by worse growth forecasts.

“Since not much has changed economically since the Pre-Election Fiscal Outlook four months ago – if anything the global outlook has improved a touch and Australian economic data has been a bit better – the size of the downgrade to the nominal growth assumptions is surprising,” Oliver wrote.

I suspect it owes a bit to the new Government wanting to paint as bleak a picture as possible from which they can implement a turnaround.

UBS economists concluded that Australia “should be past the worst of the budget downgrading cycle” and it was now up to the nation’s leaders to pave the way to a surplus by improving efficiency, repairing the revenue base and improving productivity.

“Ultimately, the budget needs to be in a better position to help Australia withstand future economic shocks,” Haslem wrote. “For now, rating agencies have said today’s MYEFO does not change the AAA stable rating.

“Ongoing budget repair underpins our view the RBA is likely to be on hold until early 2015.”

Now read: Where Is This Softening Economy The Government Is Talking About?

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