Budget 2016: Economic growth the aim, says Scott Morrison

Scott Morrison has warned that the 2016 federal budget will be confronting a difficult growth outlook.

Treasurer Scott Morrison and Malcolm Turnbull looking over the budget papers in the Prime Minister’s office. Picture: Kym Smith.

Scott Morrison has warned that today’s budget will be confronting a difficult growth outlook, with the economy held back by global stagnation.

The Treasurer told The Australian the overall goal of the budget would be to deliver a boost to the economy with a mix of tax measures, infrastructure incentives and defence procurement decisions, but he underlined the challenging outlook. “Nominal growth remains tough — no doubt about that,” Mr Morrison said, adding that the softening in global growth could be seen in last week’s GDP report in the US, showing its growth had slowed to just 0.5 per cent in the March quarter. “We’re not immune to that.”

He said lifting investment ­beyond the resources sector and supporting household consumption were the keys to increasing Australia’s growth rate.

“Both non-mining investment and household consumption are critical to the strengthening of the Australian economy,” he said. “We’re already seeing (improvement) in the household consumption side of things. Dwelling investment was also a contributor to those accounts and you certainly want to see that continue.

“You want to see a further ­improvement in the net export sector. These are the things that the budget very much needs to focus on and encourage. The budget is designed to address those ­elements — that’s its purpose.”

Nominal growth — or the value of the goods and services produced — is the key measure that determines how much tax the government can raise. It has slowed from an annual average of 7.5 per cent in the years before the global financial crisis to a ­record low of 1.5 per cent last year.

Falling commodity prices, poor wage growth and weak inflation are the main reasons for the ­collapse in nominal growth. ­Although commodity prices have improved over the past six months, the outlook for inflation has become more subdued.

Mr Morrison said the budget growth outlook would take ­account of last week’s inflation ­report showing prices had fallen in the first three months of the year.

The mid-year budget update downgraded Treasury’s forecasts for nominal GDP growth for 2016-17 from 5.5 per cent to 4.5 per cent, with smaller downgrades for the later years when growth was still forecast to rise to 5 per cent and above.

“In December, we took some very robust calls by reducing growth forecasts,” Mr Morrison said. “They were the right calls.”

He did not rule out further downgrading of the growth outlook to reflect the challenging ­global environment. “There are ­always calibrations — that is finetuning,” he said.

Economists expect Treasury’s iron ore price forecast to be ­increased from the $US39 a tonne predicted in December to $US50, which is the average price (excluding freight) that has been achieved over the past month. This would deliver a budget benefit of about $2 billion next year and $4bn the year after. The budget has also been helped by the strength of employment growth, which supports PAYG tax income and reduces the cost of unemployment benefits.

However, wage growth has been at a record low, rising only 1.5 per cent in the past year, while company profits and tax payments have also been weak.