The full year budget deficit has blown out to $37.4 billion as expected, according to MYEFO (Mid-year Economic and Fiscal Outlook) forecasts released today.
This is a $2.3 billion deterioration from the May budget estimate of $35.1 billion but within market expectations.
However, it will now take at least another year for the deficit to be extinguished with a return to a balanced budget now forecast for 2020-21.
“We need to take a safe and careful route and one that does not put at risk our jobs and growth,” Treasurer Scott Morrison says.
He calls the budget update a realistic and honest look at the economy.
“We know where the destination is and we know how we’re going to get there and we will arrive there when expenditure is less than revenue,” Morrison says.
Total revenue is expected to be $33.8 billion lower than expected over four years, mainly due to falling commodity prices leading to lower company tax receipts, and a weaker outlook for wages and population growth, leading to less income tax paid.
“Despite revenue write downs of almost $34 billion caused by falling commodity prices, a declining terms of trade, weaker global growth and the adoption of more realistic domestic growth outlook, we continue patiently and responsibly on the path to budget balance,” Morrison told a media briefing.
Capital gains tax collection is also suffering from weaker equity markets.
The MYEFO forecasts:
- GDP at 2.5% for the current financial year, down from 2.75%.
- Unemployment at 6% in 2015-16 from 6.5% and it is forecast to drop to 5.75% in 2017-18.
- The iron ore price assumption has been cut to $US39 a tonne from $US48.
- CPI at 2%
- Budget deficit at $33.7 billion in 201-17, $23 billion in 2017-18 and $14.2 billion in 2018-19.
The fall in iron ore prices is expected to suck about $7 billion from tax collections over four years. Both oil and iron ore spot prices have fallen by one-third since the May budget in US dollar terms.
Here’s the detail on the MYEFO forecasts:
MYEFO forecasts an improving world economy in 2016 and 2017, providing support to Australia’s outlook.
Growth in emerging market economies is expected to pick up in 2016 and 2017, driving more than 70% of the global rise.
“However, risks to the global outlook remain elevated, with China’s shifting composition of growth and an uncertain market reaction to the withdrawal of monetary policy stimulus in the US raising the potential for further volatility,” according to the budget update.
For China, Australia’s largest trading partner, the forecasts are unchanged at 6.75% economic growth for the current financial year.
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