Economic forecasts in federal budget could be worse than anticipated, Parliamentary Budget Office warns
The Parliamentary Budget Office (PBO) has warned the Federal Government must maintain spending discipline and increase productivity for the budget to be able to cope with an economic shock.
The independent analyst looked at how sensitive the budget bottom line is to unexpected changes in the economy.
Its report found "the risks to the budget ... appear to be weighted to the downside," with the potential for "significant negative impacts on tax receipts".
The findings are a note of caution for the Federal Government, which is projecting budget deficits will end in 2018-19.
The PBO report said "efforts to enhance productivity and maintain fiscal discipline will be necessary" to return the budget to surplus and build in a buffer against "unexpected economic shocks and other risks to the budget".
It looked at three key economic indicators: productivity, workforce participation and the terms of trade.
Labour productivity usually increases at a rate of 1.5 per cent a year and the Government is expecting that to continue.
But if it fell to 1.0 per cent, the budget bottom line could deteriorate from having a healthy surplus in 10 years' time, to only narrowly being in surplus.
Net debt in that time frame would increase five-fold.
The PBO report said recent history showed maintaining productivity growth at even 1.5 per cent has been difficult.
"The risk to labour productivity growth appears to be on the downside," it said.
Likewise, PBO modelling on the terms of trade showed a 10 per cent decrease "would reduce the underlying cash balance and increase net debt".
It found the risk to the budget appeared to be "largely on the downside, particularly in the light of recent declining trends in commodity prices".
But when it comes to the labour force participation rate, the PBO found the budget projections are "reasonably balanced".
It noted that the declining participation rate due to the aging of the population is counterbalanced by recent improvements in keeping women and older men in the workforce.
