The budget forecasts of revenue raised and how quickly the Abbott government can get it back into balance are crucially reliant on the Treasury’s forecast of economic growth.
On this front the government is forecasting GDP growth of 2.5% this financial year growing to 3%, then 3.5% in the following years. The CPI is projected to remain subdued in the middle of the RBA’s range but unemployment is set to increase according to these forecasts to 6.25% in both this and the next financial years.
This forecast in particular will worry the RBA and is much higher than most private forecasters have factored in.
The deficit has been reduced from the MYEFO expectations to $61 billion over the 4 years of the budget projections.
The fact the budget remains in deficit means that the government is still spending more than it is receiving making this an expansionary budget. But this is a big reduction in what was expected and so expectations of government’s contribution to GDP growth will now need to be downgraded.
To put this in context just last week the RBA in its quarterly Statement on Monetary Policy said the following:
With governments at both the federal and state levels planning to undertake fiscal consolidation over the next few years, the outlook for growth in public demand remains very weak. Consistent with the most recent budget projections, the contribution to GDP growth from public demand over the forecast period is expected to be around half of its long-term average.
Which means that the further reduction in government spending could weigh further on growth in the economy as it transitions from the mining boom.
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