MYEFO: Commodity prices, Senate blocks only part of budget blowout
Analysts say there are a range of factors beyond falling commodity prices and Senate blockages contributing to Australia's budget blowout.
In delivering Treasury's Mid-Year Economic and Fiscal Outlook (MYEFO), Treasurer Joe Hockey focused on Australia's slumping terms of trade to explain why this financial year's forecast deficit had jumped more than $10 billion since May, to $40.4 billion.
"We are now witnessing the largest fall in the terms of trade since records began in 1959. This has been faster and deeper than anyone expected," Mr Hockey said.
"For example iron ore, which is one fifth of our nation's export dollars, has fallen from $US120 a tonne at the beginning of this year to around $US60 a tonne today.
"The price of wheat, which is one of our largest agriculture exports, has fallen 20 per cent since the budget."
Coal prices have similarly slumped, and the Treasury forecasts that this will wipe $6.2 billion from tax receipts this year and, with no strong rebound in sight, almost $32 billion over the next four years.
However, BetaShares chief economist David Bassanese said a perception that Australia's longer-term budget problems are due to falling commodity prices is misguided.
"Even with today's downward revision to the estimated level of the terms of trade this financial year, Treasury still expect they will average 6 per cent above their projected long-run level," he wrote in a note on the MYEFO.
He argued that Treasury's own analysis shows that these above average terms of trade are actually boosting the budget bottom line by $4 billion this financial year.
What has happened since the budget is simply that this boost has dissipated more quickly than Treasury expected.
Mr Bassanese said that his estimates attribute half of the $40 billion deficit this year is caused by unemployment being higher than normal - currently at 6.3 per cent, and forecast by MYEFO to hit 6.5, while recent averages are closer to 5 per cent.
"The fact that Australia is running a large underlying budget deficit this year - despite still quite high commodity prices – demonstrates that it is weak economic growth and structural decline in tax revenues relative to GDP that are largely responsible for the lingering red ink," he added.
Mr Bassanese argued that a gradual fall in unemployment and the revenue boost from income tax bracket creep are key to the Government's forecast of a return to surplus.
Reducing super tax concessions would 'eliminate deficit'
It is an argument also advanced by former Treasury official Stephen Anthony, who has long warned that the Federal Government has to address a burgeoning "structural deficit" - that is, even when employment and economic growth are around average, it tends to be in deficit.
The Macroeconomics head of budget and forecasting told ABC News Online that page 74 of the MYEFO tells much of the story about why Australia's budget is firmly stuck in deficit - it is the page on "tax expenditures".
"The first two items relate to superannuation concessions," he said.
"Behavioural responses factored in, those two items alone, or any one of them, if they were implemented as a savings measure would essentially eliminate any structural deficit."
The items he refers to are the concessional taxation of superannuation earnings and of employer contributions - together they will cost the budget an estimated $36.25 billion this financial year, rapidly growing to almost $50 billion by 2017-18.
They also overwhelmingly favour high income earners, which Stephen Anthony said makes them a prime target for a government serious about equitably sharing the burden of budget repair.
"If those sorts of savings were combined with some of the really important structural elements which were announced on budget night to do with indexation changes, it may be possible here to cobble together a package that is acceptable to both sides of the political divide," he argued.
'Shift focus away from nonsensical surplus'
Stephen Anthony said it is imperative the Government does end the political impasse, as MYEFO includes almost $34 billion in budget savings over the next four years that have not yet passed the Senate.
"If you just assume that they aren't passed for a second, then the budget position is significantly weaker that is reported in this document," he warned.
"The Government hasn't done anything wrong by counting its measures announced in the budget as eventually being passed, but they're not passed yet."
Although some analysts argue that what is really needed now is not a surplus at all, even a medium-term target.
"Shift the focus away from a nonsensical fiscal surplus by 2019/20 and start spending now to boost growth and jobs," argued TD Securities head of Asia-Pacific research Annette Beacher in a note.
"A well-targeted infrastructure package (roads, rail, at least $50 billion) embedded in the May 2015/16 budget would be welcomed by the private sector, and could go a long way to boost long-suffering business and consumer sentiment.
"Waiting for the RBA to set a fresh record low in the cash rate is not the answer for long-term sustainable growth."
