Yahoo Finance Coalition cuts forecast surplus as budget update reveals economic slump
Labor has savaged the government’s economic credentials after the latest budget update showed Australia’s economic growth, wages, investment and household spending have all slumped since the April budget.
As the Coalition slashed $21bn from forecast budget surpluses over the forward estimates, the shadow treasurer, Jim Chalmers, said the weak result was a reflection of the Coalition’s poor economic management.
“Growth downgraded, unemployment higher, wages growth weaker, business investment dismal, the government’s economic credibility destroyed – that’s the mid year budget update in a nutshell,” Chalmers said.
“The economy is much weaker and the government has no idea and no plan to turn things around.”
While the Morrison government still remains on track to deliver the first budget surplus in 12 years, Monday’s midyear budget update shows $2.1bn has been wiped from the surplus for the 2019-20 year, downgraded to $5bn, while next year’s surplus has been downgraded from $11bn to an estimated $6.1bn.
Over the forward estimates, the cumulative surpluses will now total $23.5bn, almost half the amount projected in April.
Facing a shortfall of revenue of $32.6bn over the four-year forward estimates, the government has pegged the lower than expected balance on downgrades to superannuation taxes and GST receipts, along with other non-tax revenues.
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Household consumption has been slashed a full percentage point since the budget, down from a forecast 2.75% to just 1.75%, with the drop in consumer spending attributed to falls in house prices and continued softness in wages.
GST receipts – a reflection of consumer spending – are down $1.8bn this year compared with the forecast, a reduction of 2.7%, and are down almost $10bn over the forward estimates.
While the budget update claims the economy continues to display “resilience” in the face of weak momentum in the global economy, the revised figures show real GDP – the indicator for economic growth – has fallen to 2.25% in the current financial year, down from an estimated 2.75%.
Growth is forecast to return to 2.75% next year and 3% annually by 2021-22, which the government says will be driven by this year’s personal income tax cuts and investment in productive infrastructure.
The midyear economic and fiscal outlook document says the ongoing drought, which has hit farm GDP, will continue to have an impact on the overall economy this year and next, but the budget is assuming a “return to average seasonal conditions” in 2020-21, leading to a recovery in farm production and exports.
Wage growth, which was forecast at 2.75% in the April budget, has also come in at a weaker 2.5% for the next two years, with the government not forecasting a return to 3% growth until 2022-23.
The Reserve Bank of Australia said last month that wage growth of between 2 and 3 % was the “new normal”, despite healthy employment growth and a boost in participation rates.
Business investment is also dramatically lower than forecast, dropping from an estimated 5% in the pre-election economic and fiscal outlook to just 1.5%. After falling almost 10% in 2018-19, mining investment is forecast to grow 1% this year, down from a projected 4%.
Non-mining investment growth has fallen from 5.5% to 2%.
The unemployment rate is up to 5.25% compared with the forecast 5%, which the government has flagged will now be achieved in 2021-22.
While the government had planned to eliminate debt by the end of the decade, the update shows net debt will still be 1.8% of GDP by 2029-30, down from the 19.5% of GDP in 2019-20, amounting to $392.3bn.
The government said that amid the weaker conditions, it had kept spending “under control”, with annual real growth in spending running at 1.3% and payments as a share of GDP at 24.5%.
The treasurer, Josh Frydenberg, said despite the global headwinds, the “devastating” drought and weaker domestic conditions, the government had still been able to record a surplus.
“Despite these challenges, Myefo demonstrates that the Australian economy continues to grow, with the budget returning to surplus for the first time in 12 years,” Frydenberg said.
“In our 29th year of economic growth, Australians can be confident about their economic future.”
Frydenberg said the result was a $53.5bn turnaround on the deficit the Coalition had inherited from Labor when it came to government in 2013, with the country’s growth rate above the OECD average of 1.6%.
Since the election, the government has announced an extra $4.2bn on road and rail projects, $1.3bn on drought assistance and $624m on aged care, helping to lift public final demand from 3.25% to 4.75%.
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Key savings include $196.4m over four years through combatting illegal phoenix activity and a public service efficiency dividend to save $1.5 billion over four years to 2022-23.
The finance minister, Mathias Cormann, defended the government’s wage growth forecasts, saying wages were still tracking above inflation, and the government’s tax cuts had resulted in workers keeping more of “their own money”.
“Let me be very clear on this. Real wages growth under our government is stronger than it was when Labor lost government,” Cormann said.
“[And] if Labor had been successful in the election in May, people would have had lower disposable income, whereas now they are benefitting from the highest increase in disposable income in more than a decade.”
Chalmers said the government’s failure to boost economic growth showed that current policy settings were a “handbrake on the economy”, calling for more spending on infrastructure, the bringing forward of tax cuts, a boost to Newstart and business tax breaks.
But he said the extra stimulus could be achieved without jeopardising the budget surpluses.
“We have been saying that for some time now and not just us, the Reserve Bank, the business community, credible economists and others, peak industry groups, have been calling for the government to do more,” he said.
“The fact that the government in quite a pig-headed way has refused to do more is one of the reasons that we have these very disappointing numbers in the MYEFO today.”
Australian Council of Trade Union secretary Sally McManus said the government had “failed the Australian people for years on wage growth.”
“Australian workers are now heading into their seventh year of record-low wage growth. Scott Morrison has no idea how to raise wages. Sadly, we can expect to see continued low wage growth while Morrison’s government continues to attack unions and undermine working people’s ability to win pay rises.”
