Shane Oliver

As broadly foreshadowed in recent media, the Mid-Year Economic and Fiscal Outlook projects a budget deficit this financial year of $47bn (up from $30bn projected prior to the election) and a declining deficit out to 2023-24 at least (whereas previously a return to surplus was projected by 2016-17).

The current year’s budget blowout partly reflects the $8.8bn recapitalisation of the RBA, but a big driver of the worse budget outlook is downwards revisions to nominal growth assumptions in the economy which means less revenue growth.

Since not much has changed economically since the Pre-Election Fiscal Outlook four months ago  – if anything the global outlook has improved a touch and Australian economic data has been a bit better – the size of the downgrade to the nominal growth assumptions is surprising.

I suspect it owes a bit to the new Government wanting to paint as bleak a picture as possible from which they can then implement a turnaround, ie, get the bad news out up front.

That said there is no denying that Australia faces a long term challenge to get its budget deficit back under control now that the tail wind from the first two phases of the mining boom are behind us and as we start to see the impact of the aging population on health and welfare spending

The bad news on the budget clears the way for significant spending cuts in the May budget, which are likely to focus on welfare, health and possibly education.

The big risk of course is that the bad news on the budget coming hot on the heels of news that Holden will quit manufacturing beyond 2017 damages confidence during the important Christmas retail sales period.

All of which means that the risk for interest rates remain on the downside.

Finally, note that Australia’s budget deficit at 3% of GDP this year then falling and Federal net debt peaking at 16% of GDP  are low versus the US (net debt is at 87% of GDP), the Eurozone (net debt at 75%) and Japan (net debt at 144%).

The trouble is that after the biggest boom in history our public finances should have been in better shape. We should have put more aside in surpluses during the commodity price boom years up to 2008 and cut government spending back faster from 2010.

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