Australian Federal Treasurer Hockey will release the Mid-Year Economic & Fiscal Update (MYEFO) on Tuesday December 17.
This, the first budget update of the recently elected Abbott led Coalition government, is a significant document.
MYEFO will provide the most current dollar estimate of the likely budget deficit for this financial year.
The expectation is that the deficit in 2013/14 will be around $43bn, rather than the $30bn forecast in the August Pre-Election Economic and Fiscal Outlook (PEFO). The biggest impact is the decision to top up the Reserve Bank reserve fund, adding $8.8 billion to the deficit.
More significant will be the focus on the medium term fiscal challenge.
PEFO numbers had net debt peaking at $219bn (12.7% of GDP) in 2015/16. While gross debt was expected to climb to $370bn by the end of 2016/17 (see table 1).
MYEFO will update the budget figures for the four years to 2016/17. In addition, we anticipate MYEFO will include an analysis of budget prospects extending over the upcoming decade.
The debt ceiling (which relates to gross debt) has now been abolished. Comments from the Treasurer hint that gross debt will approach $500bn – over an unspecified time frame.
Extending the budget analysis to a ten year horizon will provide greater clarity around the costs of the national disability insurance scheme and education reform. Both schemes are considerably more costly beyond the current four year period.
In this update, we see the risk that the budget bottom line will be hit on three fronts. Namely, a downgrade of economic forecasts, a blow-out in expenditures and a less favourable tax take.
On the tax front, the risk is that the tax share of GDP does not jump from 21.6% in 2012/13 to 23.6% in 2016/17 as projected in PEFO in the current economic environment. The biggest impact on the PEFO numbers would be in the 2015/16 and 2016/17 years, potentially in the order of $10bn to $15bn annually.
These factors taken together suggest that the budget remains in deficit across the four year horizon, with a deficit in the order of $10bn in 2016/17.
Gross debt climbs to around $420bn in 2016/17, a $50bn deterioration on PEFO, on our broad figuring.
The budget is also likely to remain in deficit beyond the four year period, under the weight of climbing expenditures.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
