The federal budget deficit noose is being loosened by 'dangerously dumb' house prices

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A combination of rising house prices, helping revenue in the eastern states, and demand in China are doing the federal budget favours, according to the latest Deloitte Access Economics Business Outlook report.

However, interest rates will rise again, probably in 2018, and China’s debt poses risks for maintaining economic growth beyond the next couple of years.

Treasurer Scott Morrison will bring down the federal budget in Canberra in three weeks when he is expected to announce plans to make housing, with prices getting further out of reach to first home buyers in Sydney and Melbourne, more affordable.

The government has ruled out getting rid of negative gearing, the overarching principle that expenditure used to create income can be claimed as a tax deduction.

However, among measures on the table are limiting the tax break from negative gearing to a dollar amount, past which no deduction can be claimed, and putting a ceiling on the number of investment properties.

“China is doing the Federal Budget favours at the same time as housing prices puff up revenues for some states,” says Deloitte Access Economics partner Chris Richardson.

“These are welcome developments, allowing a loosening of the budgetary noose, with the combined national fiscal position looking better.

“At first blush that seems to suggest the nation is making healthy and continuing progress from the peak deficits for the national public sector registered at the height of the GFC in late 2009.”

However, spending continues to climb and attempts to rein it in remain “fruitless vote-losers”.

“Rather, the current improvement in deficit trajectory simply says that the twin engines of chance — a China boom and a house price boom — are both supporting the national tax take at the same time,” says Richardson

“That’s great, but it probably won’t be a long-lived combination.”

Scott Morrison. Photo: William West/ AFP/ Getty Images.

Richardson says interest rates have been so low for so long that cheap credit seems normal.

But global markets are pricing in more inflation and growth, and coming years will see rising interest rates.

“We don’t see Australian rates starting to rise until 2018, but rise they will,” he says.

“Housing prices are dangerously dumb, and the Reserve Bank won’t want to add further fuel to that fire.”

The MYEFO, Mid-Year Economic and Fiscal Outlook, said the deficit of $37.1 billion forecast in May for this financial year will be slightly lower at $36.5 billion, or about $600 million better than expected.

But next financial year the deficit will blow out to $28.7 billion, $2.6 billion worse than the May budget forecast of $26.1 billion.

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