The budget update today will be treasurer Scott Morrison’s opportunity to re-set Australia’s fiscal agenda by shaving spending and replacing unachievable goals with new ones.
Analysts and economists agree that the budget bottom line has been deteriorating, tracking worse than forecast at the May budget by then-treasurer Joe Hockey.
Those forecasts predicted a deficit of $35.1 billion for this financial year. Market economists now say this will come in between $38 billion to $40 billion.
The MYEFO (Mid-year Economic and Fiscal Outlook) will also present changes in many of the underlying assumptions for that May budget.
The economic growth outlook will be revised down to 2.75% from 3%, according to Treasury.
And the forecast price for iron ore — a key indicator for government tax revenue — will be downgraded below the $US48 a tonne number in the May budget. ANZ research forecasts suggest an average $US42 for the rest of 2015-16.
However, the weakening of the Australian dollar against the US dollar has helped ease this loss, bringing in more Australian dollars for smaller offshore earnings. The May budget estimates the dollar at $US0.77 compared to an average of $USD0.72 so far.
What Morrison has essentially inherited is a budget which overestimated revenue — tax collection — and was weakened by spending cuts which never happened, thanks to a hostile Senate.
Stephen Anthony, former Treasury official and current chief economist at Industry Super Australia, says he expects the treasurer to use MYEFO to take out the trash.
“He will probably choose the reset option, taking out the trash, by ditching every failed savings option of the Abbott‑Hockey period, while incorporating parameter estimates that undershoot the probable trajectory of the budget estimates. That way all budget news in 2016 is likely to be positive or beat expectations, at least before the next election.”
Morrison has said he will have a series of announcements with the budget update, working out how to pay for all those extra programs including the Syrian refugee intake, reversing the bank deposit tax, the $1.1 billion extra in road funding and the innovation agenda.
While there will be cuts to fund the policy initiatives, there is little to be done in the short term to fix lower revenue forecasts.
Deloitte Access Economics says China’s slowdown, falling commodity prices and weak wage growth will cut government revenues by $4.6 billion in 2015-16.
The shortfall on the tax take from individuals will be as much as $2 billion in 2015-16, rising to $2.5 billion in 2016-17. Profit taxes down by $4.4 billion in 2015-16, rising to $7 billion in 2016-17.
“Don’t underestimate how tough this is,” says Deloitte Access Economics.
“The budget boom of the past decade continues to become a budget bust.”
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