In a major recalibration of the Government’s budget process and fiscal position Treasurer Joe Hockey and Finance Minister Mathias Cormann have released the government’s Mid-Year Economic and Fiscal Outlook (MYEFO) showing a sharp deterioration in the nation’s financial position.
MYEFO updates much of the key information that was contained in the 2014-15 Budget released by the treasurer in May this year and shows the deficit for the year is now expected to be $40.4 billion.
But the key highlights of the document is what it shows about longer term expectations of the relationship between price and volume of iron ore, the terms of trade in total and crucially, in this time of weak consumer sentiment and extremely slow economic transition, unemployment.
Looking at the latter first, the downgrading of the employment outlook which now expects unemployment to rise to 6.5% (an increase of 0.25% from 6.25% in the Budget) in 2015 even with an unchanged GDP outlook of 2.5% in 2014/15 and 3% in 2015/16 – which looks somewhat heroic.
Australia’s economic output is roughly calibrated at 58% consumption with manufacturing, mining, government, investment and so on making up the rest of the economy’s output each quarter and year so this is not a good sign for the domestic side of the equation.
Likewise the forecast for Chinese growth of 6.75% in 2015 – at the very low end of forecasts – highlights that Australia’s major trading partner is in for a rough year ahead.
This might look too pessimistic, as might the forecast for iron ore, to spend two years at $60 a tonne given that the current average price is around $65 for this period.
But in the current political debate, better to be fiscally forecast safe than sorry and have to recalibrate down again in the future.