Australian treasurer Scott Morrison has released the progress report on predecessor Joe Hockey’s federal budget and it’s not a pretty picture.
The MYEFO (Mid-year Economic and Fiscal Outlook) now predicts the 2015-16 budget is $2.3 billion worse off and will hit a $37.4 billion deficit.
Plummeting iron ore prices and lower GDP growth are key contributors to the growing deficit, which is lower than some expected, but still means the nation faces larger and longer deficits under the Coalition.
GDP growth has been downgraded 0.25% to 2.5%, before rising to 2.75% next financial year, a cut of 0.5%. GDP is revised down 0.5% in the 2017-18 and 2018-19 fiscal years to 3%.
The predicted iron ore price has been shaved around 20% from the May figure, dropping from $US48 per tonne to $US39.
Another key export, coal, has seen the thermal coal price fall another 15% since the budget.
An additional $26.1 billion has now been added to the deficit over four years. The return to balanced budget is now set for 2020-21.
While there’s $3.5 billion in new spending measures since May, via prime minister Malcolm Turnbull’s innovation package, a similar amount in additional road funding and $900 million for resettling an 12,000 Syrian refugees, the government is looking to find a range of savings across the board, including a welfare compliance crackdown that will claw back $704m over three years and changes to bulk billing, aged care funding and means-tested child care subsidies will add more than $2 billion to the budget bottom line over three years.
Finance minister Mathias Cormann argues that “the overall effect of policy decisions on the budget bottom line, it has actually improved by nearly $400 million.”
But net spending is still up $1.9 billion over four years – $3.7 billion overall, including $1.4 billion in Senate deals to get the government’s agenda passed – and the government still faces the political problem that, assuming that the Turnbull government is re-elected next year, then it faces another term of budget deficits before it even starts to head towards surplus.
And for a party that built its reputation on balanced budgets, it will have spent longer in deficit than the Rudd-Gillard governments it hounded even as then treasurer Wayne Swan watched the mining boom end and the iron ore price fall.
But while some see Morrison’s announcement today as clearing the decks on the Hockey era and a recalibration of the Treasury’s approach to managing the nation’s finances, there are some positive signs in the broader Australian economy to help the treasurer.
Here are three charts from the MYEFO revealing the economic transformation in Australia is heading the right way.
First up, Australia’s output gap – the difference between potential and actual economic output – is narrowing. As with GDP growth, estimates of the economy’s potential have been reduced. This is due to decreases in the working-age population and average hours worked, reducing the potential output.
Secondly, even as mining investment collapsed by 17.3% this year, and is forecast to drop again by 25.5% next year, other areas of the economy are seeing record investment. Investment in new housing stock is up 7.7% this year, from a forecast of 6.5% in May’s budget. And the government is betting on the housing boom continuing forecasting that it will top 8.5% next year.
Approvals, commencements and work yet to be done on new housing are at record levels.
Thirdly, employment growth has been above average in the past year, driven by specific sectors.
The transition away from jobs in mining, agriculture and manufacturing and towards services is accelerating. Over the past year there has been significant growth in the number of employed in household and business services – including jobs in accommodation, food, education, health care, telecommunications and real estate.
Drilling down into the nitty gritty of the MYEFO, there some interesting moments in terms of who gets Commonwealth cash and who’s seeing it stripped away, which may strip some of the gloss from the perception of Turnbull as the friend of arts-loving environmentalists.
The Book Council of Australia announced by senator George Brandis in September during the final days of his time as arts minister is being scrapped, and arts funding is taking a $52.5 million haircut.
But the attorney-general is getting extra cash, including $10 million for a national security awareness campaign to remind people to report anything suspicious to the National Security Hotline, and Brandis and the DPP will have an extra $20 million to prosecute terrorists.
Environment spending takes a hit, with the number of Green Army projects capped at 500 annually to save $317.5 million.
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