World Economy

New Holes in Australia Budget

New Holes in Australia Budget New Holes in Australia Budget

Revenue-eroding commodity price falls and sluggish wages growth in addition to a near $5 billion jump in spending have punched fresh holes in the federal budget and pushed the likely return to surplus further into next decade.

Tuesday’s mid-year update will show the budget bottom line has deteriorated by around $3 billion since May, swelling the 2015-16 deficit to about $38 billion, Yahoo reported.

Prime Minister Malcolm Turnbull’s government will also cut its pivotal iron ore forecast for this financial year from $48 a ton, free on board, potentially by as much as $10 a ton. Iron ore delivered in China, which includes around $5-$6 in transport costs, was trading late on Friday at a decade-low of just $38 a ton, compared with its high-point in 2011 of $180 a ton.

Australia’s most dramatic collapse in its terms of trade since records began in the late 1950s has again undercut Commonwealth revenue as waning Chinese demand for commodities and a glut of new iron ore, coal and energy supplies–much of it from Australia–sends prices tumbling.

In addition to the latest revenue write-downs, the government has also been forced to absorb costs for relocating 12,000 Syrian refugees, the scrapping of the bank deposit tax and this month’s innovation statement.

Treasurer Scott Morrison said those measures as well as “other pressures” had pushed spending for this financial year to 26.2% of gross domestic product, which is the highest ratio since the “banana republic” budgets of the mid-1980s, budget documents show.

In May, the budget anticipated spending would stay at 25.9% of GDP–implying a $4.8 billion increase in projected payments for this financial year in about six months.

Morrison said the government’s budget rules mean any new spending “must be fully offset”.

“Our task has been to apply these budget rules, as well as for more recent initiatives such as the National Innovation and Science Agenda, to keep the necessary controls on expenditure as we lead into next year’s budget.”

He added that the budget would not be “restored by increasing the overall tax burden on Australians.

“Such policies favored by the opposition will only serve to retard growth and the revenue that flows from a growing economy,” he said on Sunday.

The Australian government’s fiscal prospects are not looking too rosy for the next five to 10 years. Complicating the outlook will be a major downgrade in the economy’s expected rate of longer-term growth, which had been pegged in the May budget at 3.5% for five straight years after 2018-19.