Business confidence is about to take a beating as the worsening state Australian government finance’s becomes clearer.
Goldman Sachs is now estimating a budget deficit of about $45 billion and says expected negative news is likely to have a “debilitating impact” on confidence over the coming months.
“In 2013-14 we expect the disappointing economic recovery and $8.8 billion recapitalisation of the RBA will extend this year’s budget deficit to $45 billion.”
This is about $15 billion worse than the pre-election forecast in August this year.
Goldman Sachs says sentiment is also at risk from the ongoing political fight over the extension of the debt ceiling. Does the government need $400 billion or $500 billion?
And there’s uncertainty associated with the Commission of Audit due to report by the end of January 2014 with a final report due in March.
This chart, from Goldman Sachs’ report 2014 Outlook: Australia, The Odd One Out, tells the story of the deepening federal budget deficit as each forecast proves to be an underestimation of the size of the fiscal hole.
However, Goldman Sachs Australia’s level of net debt still remains favourable in a global context.
“We expect the debt ceiling will be extended without the disruptions seen in the US,” says Goldman Sachs.
“However, the risks are now definitely skewed towards a more aggressive and more protracted fiscal consolidation over the coming years, even under the assumption of a greater role for public investment.
“We expect the nature of this protracted fiscal headwind to become clearer as we move towards the new government’s first Budget in May 2014.”