Budget 2016: Economic forces to deliver blow, Scott Morrison warns

Scott Morrison has warned the budget will be hit by economic forces beyond the government’s control.

Treasurer Scott Morrison: ‘In preparing the budget, you seek to better understand what you can’t control.’ Picture: Britta Campion

Scott Morrison has warned that next Tuesday’s budget will be hit by economic forces beyond the government’s control, as a leading analyst predicts it will show a $16 billion blowout in the deficit.

The Treasurer told The Australian last night that the government was focused on stimulating economic growth in a difficult global environment.

Mr Morrison said the budget would reveal the changes in the economic forecasts since the mid-year update released before Christmas. “These are estimates beyond the government’s control,” he said. “In preparing the budget, you seek to better understand what you can’t control, such as global economic conditions and market movements, to better focus controlling on what you can — namely what you spend and how you manage tax.”

The latest private sector forecasts show there will be another big shortfall in company tax ­receipts and weaker personal income tax revenue than Treasury had predicted. Treasury’s predictions late last year for Australia’s economic growth and inflation are seen as too optimistic and are expected to be downgraded.

Mr Morrison said the government had set down firm rules for managing the budget in a difficult economic environment. “In the areas we can control, the government has set down strong guard rails about how to frame the budget, by not spending on outlays more than you save on outlays, and where there is an increase in revenues in one area because of policy decisions, you seek to reduce the tax burden in other areas. We do this to keep the budget on the path back to balance and ensure that we don’t threaten growth and jobs with an increased tax burden, especially at this critical time as our economy moves from the mining investment boom to a more diversified and stronger position.”

The Treasurer said growth initiatives to be outlined in the budget, which are expected to include proposals to boost infrastructure spending, would bring improvements to the budget position.

“By growing the economy we will continue to see revenues rise as they were projected to do in the mid-year update, over the forward estimates,” he said.

Mr Morrison contrasted this with Labor’s strategy, which includes tax measures to raise $100bn over a decade. “The government will continue to lower the deficit by constraining spending, ensuring every taxpayer dollar is spent efficiently — not by adding to the tax burden on the Australian economy,” he said.

A budget analysis by Deloitte Access Economics shows the government is succeeding in keeping control of spending but revenue remains a problem, even with the recent recovery in the iron ore price. It warns public debt is in danger of passing a point of no return, with the budget unable to deliver a sustainable surplus in the face of Senate obstruction and continued revenue writedowns.

Net debt was forecast in the mid-year budget update to reach a peak of 18.5 per cent of GDP in 2017-18 and start falling rapidly, dropping back below 10 per cent of GDP by 2025-26 as budget surpluses and economic growth improve the government’s financial position.

Deloitte’s budget review predicts debt will keep rising to reach 20 per cent of GDP by 2018-19. It would then start falling only slowly, assuming the Senate passes the savings measures yielding between $3.5bn and $4.5bn a year that it is still opposing from the Abbott government’s first budget. If the government cannot get these measures passed, debt would remain at 20 per cent of GDP indefinitely based on existing policies. Deloitte notes this assumes Australia’s run without a recession can continue for a third of a century, with the risk that the medium-term budget and debt outcome will be much worse.

“Both our forecasts and the addition of Senate costs imply a peak in debt comfortably above where it peaked in the aftermath of the recession of the early 1990s, and hence above debt ratios that have previously triggered downgrades in commonwealth debt by ratings agencies,” says Deloitte’s Chris Richardson.

He says the budget should include writedowns of $16bn over the forward estimates, reflecting shortfalls against Treasury forecasts of individual, company, superannuation and petroleum resource rent taxes.

Labor Treasury spokesman Chris Bowen said this would bring writedowns since the 2013 election to $43bn.

“Given the price of iron ore has rallied to its highest level in 15 months in recent weeks, the government has no excuses and should be expected to deliver a better result than this,” Mr Bowen said.

“This is the Liberal government that promised lower debt, surpluses, lower spending and taxes and have delivered the opposite.”