Slow wages growth is making it harder to rein in Australia’s budget deficit, according to analysis by Deloitte Access Economics in its latest Budget Monitor.
And treasure Scott Morrison says the timeline for a return to surplus could move because of a change in revenue projections.
Deloitte is forecasting an underlying cash deficit of $40.49 billion this financial year, $3.37 billion worse than the budget forecast.
“The largest single component of national income is wages,” says economist Chris Richardson. “And we see the national wage bill as 1% smaller in 2016-17 than the budget factors in.”
Wages are growing at their slowest on record. The Australian Bureau of Statistics last week released data showing wages rose 1.9% in the year to the end of September.
“Both wages and jobs look likely to undershoot official forecasts,” says Richardson.
“Wage gains are being held back by the associated weakness in inflation — also running slower than official forecasts — and by an economy that isn’t shooting the lights out. And jobs have also failed to fire of late.”
Deloitte Access Economics says the budget shortfall versus official estimates worsens this year and next.
“Although the cost of Senate delays eases (as we make the devil-may-care assumption that savings pass parliament by mid-2017), the costs to revenue accelerate,” says Richardson.
“There are challenges seen on almost every front: underperformance on wages and jobs is forecast to continue, we see shortfalls creeping back in on company tax, super may also fall shy, and GST may do the same.”
Deloitte forecasts the tax take on individuals to fall short of the budget by $1.3 billion in 2016-17 and by $2 billion in 2017-18.
The recent improvement in commodity prices may also not help that much in company taxes from mining companies.
Deloitte Access Economics doesn’t think higher coal prices will last and many coal miners will need to work through losses before tax dollars start flowing to the government.
Treasurer Scott Morrison the government isn’t counting on the jump in commodity prices.
“What he (Richardson) said about the revenue side of the equation is telling, and I think it puts to rest some of the more enthusiastic commentary, which says that the budget will all be fixed by the movement in the iron ore price. I don’t think that’s true at all,” Morrison told the ABC.
The federal budget estimates that the budget will return to budget in 2021. Morrison says that forecast was made on the numbers available at that time.
“I know others in the past have made bold predictions and promises about this,” says Morrison. “The 2021 budget was a prediction based on the numbers. The numbers move. They always have.”
Deloitte also says the low in low inflation world in which Australia is currently trapped takes its biggest toll on profits.
“Firms can boost their profitability more easily when prices are on the move, but a stagnant pricing environment isn’t a target rich environment in which to boost profits,” says Richardson.
Deloitte is forecasting that profit taxes will fall short of budget forecasts by $0.3 billion in 2016-17 and by $1.8 billion in 2017-18.
Australia’s mid-year budget update, MYEFO, is due to be released next month.
Here are the full budget forecasts by Deloitte Access Economics: