Mid-year economic and fiscal outlook predicts the 2014-15 deficit will be $40.4bn

This article is more than 5 years old

This article is more than 5 years old

Australia’s budget deficit will be nearly $11bn higher than expected this financial year, largely as a result of lower-than-predicted revenue, while unemployment is forecast to rise to 6.5%.



The federal government’s mid-year economic and fiscal outlook (Myefo), released on Monday, predicts the 2014-15 deficit will be $40.4bn, significantly higher than the $29.8bn predicted in the budget seven months ago.

Total deficits for the coming four years have risen from a combined $60.3bn in the May forecasts to $103.9bn now.

The treasurer, Joe Hockey, and the finance minister, Mathias Cormann, released the document in Canberra on Monday after a postponement related to the Sydney siege.

The government said a large part of the deterioration in the budget bottom line was a result of global economic headwinds and downgrades in commodity prices. The price of iron ore has fallen by more than 30% since the budget.

The collapse in such prices and weaker wages growth have led to a $31.6bn downward revision in tax receipts over four years.

“In the last six months unforeseen events have hit the Australian economy,” Hockey said.

“In particular, 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.”

Delays in passing legislation and difficult negotiations with the Senate have also cost the budget $10.6bn over four years, the document suggests.

Australia’s economic growth is predicted to be a below-trend 2.5% this financial year, before recovering to 3% in 2015-16 and 3.5% in the years after that. These gross domestic figures are the same as predicted in the May budget.

But the jobless rate is higher than predicted. Myefo suggests unemployment will rise to 6.5% this financial year and the following year, compared with the original forecast of 6.25%.

The government has cut an extra $3.7bn from budgeted foreign aid spending over three years, comprising $1bn in 2015-16, $1.35bn in 2016-17 and $1.37bn in 2017-18.

This comes on top of the earlier $7.6bn cut from budgeted foreign aid spending outlined in the May budget. Cuts to foreign aid do not require specific legislation.

These cuts are designed to offset $1.3bn in new defence and national security spending. The costs include $650m for security and intelligence agencies and nearly $300m for Australia’s military operation in Iraq.

Myefo revealed Australia’s trade agreement with Japan would cost the budget $1.6bn over four years as a result of reduced tariff revenue.

In the immigration portfolio, the government will save $412m over four years by processing previously arrived asylum seekers in the community rather than in detention centres wherever possible.

The Coalition will save an extra $852m by delaying the end date for its planned freeze on family tax benefit payment rates and eligibility thresholds for government payments.

“I say directly to the Australian people that whilst we have faced many challenges, we have made a good start fixing the budget,” Hockey said. “There is still much work to do but we are on the right track.”

The shadow treasurer, Chris Bowen, and the opposition’s finance spokesman, Tony Burke, said the Coalition was elected promising to improve the budget but “instead it has become so much worse”.

In a joint statement, Bowen and Burke raised concern about increasing unemployment and costs for families, saying the “unfair” May budget had damaged consumer and business confidence.

“This is Tony Abbott’s and Joe Hockey’s budget disaster – and they are entirely responsible for it,” Bowen and Burke said.

The acting leader of the Greens, Adam Bandt, said the government had refused to listen to the public and the parliament and was “still trying to balance the budget by taking the axe to the young, the old, the sick and the poor”.

“Someone will have to pay more tax or lose some concessions to raise the revenue we need and the question is whether it’s the big polluters and big banks or everyday Australians,” he said.

Cormann confirmed plans to reduce the number of government bodies, agencies, boards and advisory committees by 175.

Some of these bodies would be abolished and others would be merged or absorbed into existing government departments.

Cormann said the new decisions would bring the total savings from the Coalition’s “smaller government agenda” to $540m.

In a ministerial paper issued on Monday, Cormann signalled that the government would implement “a fourth tranche of smaller government reforms” in the next budget in May.

“Independent experts will begin by reviewing the roles of and potential for efficiencies in the Department of Health and Department of Education,” the ministerial paper said.

The national secretary of the Community and Public Sector Union, Nadine Flood, criticised the Coalition’s decision to look at “contestability” in government tasks, saying this was “nothing more than cover for massive outsourcing and privatisation programs that will see jobs and services sold off”.

In the lead-up to Myefo, Hockey had been preparing the ground for significant revenue write-downs and a delay to the return to surplus.

In explaining why he would not make further deep cuts to domestic spending, Hockey said the budget needed to act as a “shock absorber” to safeguard jobs and prosperity.

Labor accused Hockey of hypocrisy given his strong criticisms of the former Gillard government over revenue write-downs.

The chief executive of the Australian Industry Group, Innes Willox, said the results underlined the need for Australia to find multiple sources of economic growth rather than relying solely on resource and energy commodities.

The president of the Business Council of Australia, Catherine Livingstone, said the government must tackle intergenerational pressures and fiscal challenges “in conjunction with a concerted strategy to grow the economy”.

The chief executive of the Australian Chamber of Commerce and Industry, Kate Carnell, said the budget deterioration should serve “as a major wake-up call for the federal opposition and crossbenchers” to stop blocking necessary savings measures.