Well, well, don’t let Joe Hockey fool you. He a bear! A big growling, grizzly bear. He has bashed Treasury into some dour forecasts for the Mid Year Fiscal and Economic Outlook, below those of the RBA and on a par with more bearish private forecasts. These are almost down the MB levels.
Here are the new economic forecasts and everything has been slashed:
GDP is still at 2.5% for 2013/14 but has been gutted to 2.5% from 3% for 2014/15. Treasury is now the only official agency that agrees with me that that year will also be below trend. Nominal growth has been cut by 0.25% this year and q full 1% next year.
The dwelling construction recovery has been pushed out a full year and the mining capex cliff has been fully embraced in huge cuts to business investment from 1.5% to -1.5% this year. And from -0.5% to -2% next year.
Both exports and imports have been cut and the terms of trade fall for 2014/15 has been rounded up from 3.75% to 5%. Don’t tell Morgan Stanley but its 2015 current account surplus is a 4% current account deficit according to Treasury.
Somehow these changes result in the same unemployment rate next year.
The impact on the fiscal forecasts is just as huge, with big deficits as far the eye can see:
No pretend surpluses here. Pick a year my friends, any year. My personal favourite is the PEFO $4 billion surplus of 2016/17 turning into a MYEFO deficit of $17 billion!
And the reasons why?
- Slower growth in real GDP, together with softer domestic prices and wages, have resulted in significantly lower nominal GDP, which has largely driven the reduction in tax receipts by more than $37 billion over the forward estimates.
- The softer economic outlook, coupled with changes in demand‑driven programmes and the revised assumption for projecting the unemployment rate, has increased total payments by $11.3 billion over the forward estimates.
- Actions by the Government to address the legacy issues inherited from the former Government have impacted on the budget position over the forward estimates, with the largest of these elements being the $8.8 billion grant to the Reserve Bank of Australia.
This Budget is out of control. Why the macro group at Treasury is not being fired is beyond me.
Is it low enough now? I would say it’s still slightly on the optimistic side because there is no way that the Government can sit and watch these projections play out. This sets up another round of big cuts to future spending and tax hikes in next year’s May Budget. That’s what the big bear is already saying, from the AFR:
The federal government has warned of the need for “serious policy change” and that “all options are on the table’’ as the Mid-Year Economic and Fiscal Outlook forecast a combined deficit of $123 billion over the next four years and for gross debt to hit $667 billion in a decade.
The MYEFO warns Australia is not living within its means and rectifying it requires “the elimination of waste’’ and for “people to adjust to reductions in some spending to which they have become accustomed’’.
In releasing the MYEFO, Treasurer Joe Hockey signalled deep cuts to come in next year’s May budget. He warned “returning the budget to sustainable surpluses will not be achieved by piecemeal savings here and there”.
“It will require a sustained and fundamental structural overhaul of expenditure,’’ he said of the May budget. “All options are on the table’’.
That’ll hit growth again, I’m afraid!
