"The balanced budget predicted for 2017-18 is well and truly toast." A new Deloitte report predicts the deficit will be $5 billion worse this year than projected in the government's May budget. The deficit is then likely to be $10.1 billion bigger than projected in 2015-16, and $11 billion and $9.6 billion bigger than projected in 2016-17 and 2017-18 respectively. That will push the estimated total budget deficit to $35.7 billion over the next four years.

The budget deficit is set to worsen, analysis shows. Credit:Alex Ellinghausen The warning comes just days after the Parliamentary Budget Office issued its own warning of the government's likely budget deficit. Last week the PBO published an analysis of the "sensitivity" of three main drivers of the Australian economy – labour productivity growth, the labour force participation rate, and the terms of trade – and found government revenues could fall by $32.4 billion by 2024-25 if labour productivity grows by less than the annual average rate over the next 10 years while government revenues could fall by $10 billion by 2024-25 if world mining commodity prices fall a further 35 per cent. Last month analysis from consultancy group Macroeconomics predicted that deteriorating iron ore prices had knocked a $51 billion hole in Treasurer Joe Hockey's first budget. The Deloitte Access report, published on Monday, shows Australia's weak economy is seriously starting to drag on the budget.

The reasons for the hit to the budget are manifold. Income taxes and profit taxes are falling heavily, the senate is blocking big savings measures, the huge fall in the price of iron ore in recent months has hit government revenues hard, and the government's commitment to the war against the terrorist group Islamic State in Iraq is adding to the budgetary mountain. Treasurer Joe Hockey is expected to update his budget in the next two weeks and budget update – called the Mid-Year Fiscal and Economic Outlook (MYEFO) – will have to take account of these developments. Mr Hockey will have to come to grips with the big falls in income taxes and profit taxes. The Deloitte report shows weak jobs growth and flat-lining wages growth mean total income taxes on individuals will fall short of budget estimates by $2.9 billion this year alone.

Company taxes, superannuation taxes, and resource rent taxes are set to drag down the tax take by another $1.9 billion this year. One bit of good news is that low interest rates are helping to boost GST revenues via a healthy pick-up in housing renovation and construction. That means the tax take from 'spending taxes' will be $2.7 billion better than expected this year, and $2.6 billion better than expected in 2015-16. But the GST "outperformance" will be passed to the states, so the federal government will get to hang on to less than half the dividend from the GST rise. "Since the budget, Australian policy has barely budged," Mr Richardson says in his report.

"Many measures didn't make it through the senate. Other clearly won't. And at the same time the government has announced new money to support its key priorities, as well as to respond to ongoing national security development and to do deals with the Senate so as to pass a slowly rising proportion of its policy program." All up, these new policy costs since budget night in May will add to spending by $2.5 billion in 2014-15 and by $2.9 billion in 2015-16. "That says red ink will once again be the new black when it comes time to update the bottom line in MYEFO," the report warns. "That is mostly due to revenue woes, with the heavy hitters of income tax and company tax both showing a new round of major write-downs." "Yet this time the bad news will also be coming on the spending side too, as national security fears combine with deals done in the senate to undo a bunch of the heavy lifting in terms of the cuts to projected spending in the May budget."