Treasurer cuts budget surplus by $2 billion

The Morrison government has abandoned its goal of eliminating net debt by the end of the next decade, as growing economic headwinds force it to slice $2 billion off this year's forecast surplus.

Treasury has also cut its employment forecasts, predicting jobs growth would "moderate" over the coming years.

The economy now won't hit Treasury's forecast of the natural rate of unemployment of five per cent until 2021-2022, pushing any predicted return to normal levels of wage growth of above three per cent out until 2022.

Declaring the outlook for the Australian economy remained positive, Treasurer Josh Frydenberg noted both the International Monetary Fund and the Organisation for Economic Co-operation and Development had downgraded global growth in 2019 and 2020 as "economies the world over experience the challenges from global trade tensions".

Monday's mid-year economic update revealed the first forecast surplus since the global financial crisis is now predicted to hit $5 billion, down from budget forecasts of $7.1 billion in April. That trend will continue with an $11 billion surplus in 2021 cut in half on Monday. It will now only reach $6.1 billion.

In total, up to $22 billion was wiped from forecast surpluses over the the next four years.

Treasurer Josh Frydenberg has sliced $2 billion off this year's forecast surplus.Credit: Alex Ellinghausen

The lower surpluses mean net debt is projected to be 1.8 per cent of gross domestic product by 2029-30, up from the zero per cent forecast in the federal budget.

The target was used by Finance Minister Mathias Cormann in April to pledge the Morrison government was "moving to the second stage of our plan" by eliminating net debt by 2030 after delivering a decade of surpluses. That key milestone disappeared on Monday.

Overall economic growth forecasts have been cut from 2.75 per cent to 2.25 per cent for this year, while Treasury remains optimistic it will return to trend levels by 2022-23.

Persistently low levels of retail spending mean the states and territories will bear some of the pain. GST revenues are expected to be $1.8 billion lower this year and $10 billion over the forward estimates.

In a sign of the soft economy, car tariff revenues have been cut by five per cent this year and next. The government has taken a $700 million company tax hit this year and $2.8 billion in 2020-21.

Amid fears of an economic downturn, tumbling global interest rates have helped the government. The interest bill has been shaved by $446 million this year and $3.8 billion over the next four despite the government holding more debt.

On the revenue front, the government has shelved plans to proceed with a biosecurity levy after consulting with industry – costing it $384 million over the next four years. At the same time it will save $467 million through a public service efficiency dividend.

Drought and aged care were the two main spending programs in Monday's update. The government’s interim response to the aged care royal commission will cost $623 million over four years while $1.3 billion will be spent on drought relief.

The urban congestion fund, which will deliver short-term projects like commuter car parks, has had a $210 million boost on top of greater infrastructure spending of $4.2 billion over the next four years.

"Despite increased expenditure on those high priority areas and significant revenue write-downs, we remain on track to return to surplus and remain in surplus as we continue to control expenditure growth," said Senator Cormann.

Mr Frydenberg also used Monday's update to announce a delay in the release of the next Intergenerational Report.

The report, which by law must be delivered five years after the previous one, will now not be handed down until July 2020. That will be after the next budget and following the findings of the Retirement Income Review.