Bottom line to 'deteriorate' before we hit 2021 surplus

TREASURER Scott Morrison is sticking to his plan to return the nation's finances to surplus by 2021, even though the budget bottom line is expected to deteriorate in the interim.

The mid-year budget review, released on Monday, shows that while there was a tiny improvement in this financial year's deficit to $36.5 billion since the May budget, but deficits over the next three years will be larger than previously forecast.

While a recent rise in iron ore and coal prices will provide support, this will be offset by weak wage and non-mining company profits growth.

The Treasurer said the budget was in better shape today than it had been at the last mid-year review.

"Despite the many global and domestic challenges we face in our economy, and accumulated deficit of $94.9 billion over the Budget and forward estimates means Australia's fiscal outlook in this MYEFO is in a better position today than it was a year ago in last year's MYEFO when it was $108.3 billion and three years ago when it was $122.7 billion," Mr Morrison said.

He also said Australia's economic outlook remained positive despite the latest national account figures from September showing growth had declined 0.5 per cent over the quarter.

"Once again, the Government has demonstrated we do not spend more than we save," Mr Morrison said.

"And that the predominant mechanism for restoring the Budget to balance is by getting expenditure under control.

Net debt was projected to peak lower at 19 per cent of GDP next year and then decline over the medium term to around 10 per cent, he said.

In a joint statement, Mr Morrison and Finance Minister Mathias Cormann said the economy was continuing its transition in the wake of the mining investment boom, despite the downward revision to growth forecasts.

"Economic growth is expected to increase over the forecast period, as the drag from the decline in mining investment dissipates and the economy transitions to broader-based growth, supported by historically low interest rates and a lower Australian dollar," they said.

"Exports and household consumption are expected to support growth, with dwelling investment higher in the near term."

Non-mining business investment was expected to pick up modestly in coming years, despite volatility in commodity prices making forecasts challenging.

"To support economic growth the government will continue to implement our national plan for jobs and growth," the ministers said.

Treasury's unemployment forecasts remain largely unchanged from May, at 5.5 per cent for 2016-17 and 2017-18 with a slight downgrade in projections for the final two years of the forward estimates - from 5.5 per cent to 5.25 per cent.

Economic growth is expected to come in at two per cent in 2016-17, remain below trend at 2.75 per cent in 2017-18 before picking up to three per cent in 2018-19, according to the mid-year economic and fiscal outlook released on Monday.

It's a deterioration from the May budget, which had GDP at 2.5 per cent in 2016-17 and three per cent in 2017-18 and followed shock September quarter growth figures showing the economy posted its worse performance since the global financial crisis.

Inflation forecasts have also been downgraded to 1.75 per cent in 2016-17 from two per cent - below the Reserve Bank of Australia's preferred two-to-three per cent target range.

Morrison earlier said he wouldn't shelving any of the government's election commitments despite a deteriorating budget position.

But the coalition needed partners in the parliament to help it return the budget to balance.

Mr Morrison will be hoping global credit rating agencies will be just as forgiving when he hands down his midyear budget review today.

Speaking to reporters in Canberra, Mr Morrison said the government would come good on all its election commitments, but in a way that did not retreat from the job of budget repair.

The government could put forward savings measures "as we do" but they needed parliament's support to ensure the trajectory of returning the budget to balance was maintained.

Mr Morrison said Australia faced very difficult fiscal and economic challenges.

"I think we need ... a strong wake-up call about the need to understand the depth of these challenges," he said.

Mr Morrison said the update was a careful document that took into account many things that had happened during the past five to six months, including major shifts in commodity prices and negative growth in the September quarter.
"This shows a very prudent, a conservative and responsible outlook of the Australian economy."

His comments come as survey has found two out of three Australians think budget deficits are okay in certain circumstances.

However, economists believe there is a 50/50 risk of the nation losing its triple-A rating if the budget has deteriorated since May as to delay a projected surplus in 2021.

A downgrade would hit confidence, raise borrowing costs and be a huge embarrassment for the government.
Deloitte Access Economics economist Chris Richardson said both sides of Parliament were to blame for the current state of the budget but Opposition parties had been the real "weapons of mass destruction" in Australian politics over the past two decades.

"What gets done in Australia these days depends much more on Oppositions than it does on Governments," Mr Richardson told ABC today.

"It takes two to tango in terms of Budget repair.

"Absolutely happy for parliament, both sides to be blamed but we need to up the ante, the pressure on Oppositions to be more responsible.

The Australian public was also to blame, Mr Richardson said.

"The Australian public happily took eight personal income tax cuts in a row and took massive increases in family benefits and at the time baby bonuses and all those sorts of things," he said.

"As a nation we made the oldest mistake, one Australia's regularly made - we assumed a boom was permanent and we spent it, we made permanent promises to ourselves. That boom turned out to be temporary."


Can this man save Australia's AAA credit rating?

WELFARE cheats and environmental programs will be in the firing line when Treasurer Scott Morrison hands down the midyear Budget update.

It is expected to show a deterioration in the bottom line since May, amid lower company profits and stagnant wage growth.

Australia is trying to hang on to its prized triple-A credit rating, and Mr Morrison will need to convince the three global ratings agencies that the Turnbull Government would find further savings measures - palatable to Labor or the crossbench - to tackle debt and deficit and deal with the end of the mining boom.

A loss of the top-tier credit rating could force homeowners to pay hundreds of dollars more in mortgage repayments each year.

The Budget papers are expected to reveal the government will axe the Green Army - an Abbott government initiative which employs young people on environmental projects - to save money.

The government has also revealed plans to recoup $2 billion over four years by chasing welfare recipients who made wrongful claims, even years after the payments were made.

But Deloitte Access Economics believes the government will struggle to meet its Budget forecasts. Despite a surge in commodity prices, it predicts the deficit will blow out to $40.5 billion next year, about $3.4 billion worse than budgeted.

Finance Minister Mathias Cormann said Sunday lower company profits and poor wage growth had resulted in lower tax receipts, hurting budget repair efforts.

"The recent increases in commodity prices are not enough to offset the effect of low wage inflation, particularly on income tax receipts and the low growth in company profits," he told Sky News.

Labor's finance spokesman, Jim Chalmers, defending his party's opposition to some savings measures, said the government had no one to blame but itself for a deterioration in the Budget.

"We think the government could fix this debacle and lock in the AAA credit rating if they abolish their $50 billion tax cut," he said.

The Budget review comes just weeks after national accounts figures revealed the worst quarterly performance since the global financial crisis.

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