The budget deficit won't be as bad as many think

Joe Hockey has a warning from the OECD. Photo: Getty / File

There has been a lot of positive news around for the Australian economy in recent months. So much that we said last month that “the worst may be over.”

Business conditions have been improving. The construction sector – which has powerful flow-on effects for retail and other industries – has been starting to roar. Australians are spending more than they are earning, which signals that consumers are actually quite confident about the future, despite what they may report in the confidence surveys. And in recent weeks it looks as if the iron ore price may have found a bottom. Overnight it was back up above $US61 a tonne – a long way from the $US35 the government was apparently contemplating just weeks ago.

There are significant headwinds. The Aussie dollar is up near 80c and probably should be a fair bit lower in order to kick the economy along. The biggest question in global markets – when the US Federal Reserve will raise rates – remains open, and hard to measure in terms of its potential impact. And there’s a lot of uncertainty about the pace of the slowdown in China, Australia’s biggest trading partner.

For a long time the conversation around the state of the Australian economy has been deeply negative, not helped by years of talking about “debt and deficit disaster” and the need for emergency budget action which meant, as we saw last year, cutting government support from some people who really needed it.

While there is undoubtedly a need for the parliament to be realistic about the need to approve spending reductions, the crisis talk has arguably been deeply unhelpful as the economy has transitioned away from the heady days of the mining investment boom, needing some consumer enthusiasm to cushion the blow. The RBA has stepped in and lopped 50 basis points off interest rates this year to help it along, as well as make Australia’s exports more competitive.

The data has been starting to point in the right way. You’ll have noticed less talk in recent months about the debt and deficit disaster. And this morning, Joe Hockey said on TV that the deficit would be “better than market expectations”.

The mid-year financial update in December had the deficit rising to $40.4 billion. As an example of where the market has been expecting it to finish, Goldman Sachs – which has a pretty bearish take on the Australian economy at the moment – has predicted a $48 billion deficit.

It’s quite possible that tonight Joe Hockey will be talking about a number with a three at the front of it. And The Australian reports this morning that “for first time since the global financial crisis, future deficits are forecast to be consistently smaller than $40bn.”

A surplus is still well over the fiscal horizon, but when it comes to changing the conversation on the economy and making reparations for last year’s confidence massacre, it’s a good number to be working with.

Joe Hockey has had a challenging week, with his authority and his influence, even his future, being questioned. The damage can’t all be undone with one document, but he has a chance to reshape the debate about Australia’s economy starting tonight.

SEE ALSO

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at research.businessinsider.com.au.