Budget 2017: Don’t hold your breath on these projections

Treasurer Scott Morrison delivers his budget speech.

Haven’t had a decent pay rise for years? Fear not. The government has forecast wages growth will ­accelerate from 2 per cent this year — the same pace as inflation, so no increase in real terms — to 3 per cent within two years, giving Australia one of the fastest wages growth rates in the world.

And the unemployment rate is expected to fall from 5.9 per cent now to 5.5 per cent by 2019, on its way to 5 per cent afterwards.

Don’t hold your breath, though.

The government’s latest budget­ has, once again, feather-bedded its bottom line with optim­ism despite rising wages, falling unemployment and increasing economic growth all being inaccur­ately and repeatedly forecast since the financial crisis.

Cyclone Debbie, which hit Queensland in late March, inflicting widespread damage and flooding, is to blame for sapping GDP growth this year. It will accelerate from 1.75 per cent this year to 2.75 per cent next year.

“To absorb spare capacity in the economy from 2020 to 2024 the economy is projected to grow faster than potential at 3 per cent,” the budget papers added.

This stubborn assumption that the economy whirrs back to its “long-run trend’’ level, which has fuelled huge errors­ in revenue forecasts since 2008, has been maintained.

“Accommodative monetary policy, a lower exchange rate and a flexible labour market are all helping to facilitate the economic adjustment that has been under way for some time following the peak of the investment phase of the mining boom,” the Treasury said, noting that the nation had entered its 26th year of economic growth. Naturally, those growth figures don’t factor in population growth, which at 1.5 per cent is the second-fastest in the developed world.

Long-suffering business investment, which has stubbornly resisted successive interest rate cuts, is expected to bounce back, and rise 3 per cent next year, after years of decline.

The budget papers don’t formally forecast the house prices but implicitly nothing bad is allowed to happen there.

Household consumption, the biggest component of economic activity, is expected to rise from 2.5 per cent this year to 3 per cent. Only last week Reserve Bank governor­ Phil Lowe worried publicly that a slump in house prices would undermine confidence, prompting consumers to drama­tic­ally pare back spending to service rising debts. The budget assumes the Australian dollar stays around US76c, a little above the level in recent days, which is about 30 per cent below the peak in 2011. Falls in the exchange rate typically help the budget’s bottom line. The budget assumes no change in official interest rates this year.

“China has entered 2017 with good momentum and the US economy is performing well,” the budget said, expecting China’s economy to rise by more than 6 per cent a year in coming years. It hasn’t shunned caution entirely though, ignoring, for instance, US President Donald Trump’s promise to put a rocket under US economic growth. The US is expected to keep growing at 2.25 per cent a year. Dwelling investment is expected to fall by 4 per cent in two years’ time.

Iron ore and coal prices, which shot up largely as a result of Chinese government stimulus, are expected to fall gradually.