Mid-Year Economic and Fiscal Outlook
15 December 2014:
Treasurer Joe Hockey, and Finance Minister Mathias Cormann, today released the Mid-Year Economic and Fiscal Outlook (MYEFO) revealing the budget deficit for 2014-15 is now expected to reach $40.4 billion (2.5% of GDP), a deterioration of $10.6 billion since the Government’s first Budget in May. In a short statement, Treasurer Hockey said that over the past year the “Australian economy has continued to strengthen despite significant offshore headwinds”. These ‘headwinds’ will also impact future budgets as the Government revealed a $43.7 billion deterioration to budget bottom lines over the forward estimates. Next year’s deficit is now expected to be $31.2 billion, up from the $17.1 billion figure revealed in May, while a surplus is now not expected until 2019-20.
MYEFO includes new spending cuts, most notably to the foreign aid budget which will be cut by $3.7 billion over four years. The Government will also abolish or merge 175 government agencies and bodies, and reduce the public service head count further with the aim of returning to levels recorded in 2007-08. The Government also aims to keep annual wage rises across the public sector to 1.5% or less over the next three years.
In terms of the Senate, the Government notes that the total cost to the budget of Senate delays and negotiations is $10.6 billion over the forward estimates. Importantly, MYEFO notes that approximately $33.9 billion of measures ‘that improve the budget position’ also remain unlegislated, a situation that will further weaken the budget position if measures are not passed by the Senate.
MYEFO also revealed that tax receipts are expected to fall by $6.2 billion in 2014-15 and $32 billion over four years, while company tax and income tax are both expected to be $2.3 billion less in 2014-15. The Budget has also seen larger than expected increases in family payments and income support. In response, the Government will announce details of a families’ package in early 2015, including child care and parenting leave initiatives.
Despite weak global conditions, the Australian economy is expected to continue growing strongly owing to increased export volumes, a reduced Australian dollar and record low interest rates. However Treasurer Hockey said that Australia is currently seeing the largest fall in the terms of trade since records began in 1959.
As the Chinese economy continues to slow, global prices for iron ore and coal have dropped, placing downward pressure on Australia’s terms of trade. Nevertheless, Australia is expected to benefit from growth in the Asia-Pacific region, with growth in Australia’s major trading partners expected to outpace global growth at 4.5% in 2015 and 2016.
It is expected that in the near-term, the Australian economy will continue to transition away from resources investment-led growth, to broader based drivers of growth including housing and exports. This is expected to lead to a growth rate of 2.5% for 2014-15, before the economy returns to near trend growth of 3% by 2015-16.