Getting Scott Morrison to spend money is close to Mission Impossible but at least the parsimonious PM has slackened the savings reins a little in the face of the slowing Australian economy.
The mid-year economic update – as expected – sliced $2 billion off this year’s forecast surplus and forced the Morrison Government to abandon its goal of eliminating net government debt by the end of the next decade.
Weaker growth and employment to blame
The culprit was growing economic headwinds with employment forecasts down as Treasury’s forecast 5% unemployment rate was pushed out to 2021-2022.
That means wages growth of 3% plus will probably have to wait until 2022 with this year’s surplus down from a predicted $7.1 billion in April to just $5 billion now.
Future surpluses will also be weaker with the $11 billion surplus predicted for 2021 now slashed to just $6.1 billion.
Most of that is due to less heroic economic growth figures – down from 2.75% to 2.25% this year – but there is also some sign of the Morrison Government loosening the purse strings in response to the drought and the slower than expected recovery in the economy.
Drought and aged care get more money
Drought and aged care were the two new main spending programs in the update with the government’s interim response to the aged care royal commission costing $623 million over four years while $1.3 billion will be spent on drought relief.
Another mild stimulus came in the urban congestion fund, which is designed to deliver short-term, shovel ready projects like commuter car parks near railway stations.
An extra $210 million boost was added to a higher infrastructure spend of $4.2 billion over the next four years.
Government debt will hang around much longer
The lower surpluses mean that net debt is predicted to still be running at 1.8% of gross domestic product by 2029-30 – a time when the April budget had forecast it would reach zero.
That means the government has backed away from its original plan to eliminate net debt by 2030 after a decade of surpluses.
Overall economic growth forecasts have been cut from 2.75% to 2.25% for this year, although Treasury thinks it will then rise back to trend levels by 2022-23.
Weak consumer spending is starting to bite
Weak consumer spending will cause some pain for the states with GST revenues expected to be $1.8 billion lower this year and $10 billion over the forward estimates.
There are plenty of other signs of retail weakness with car tariff revenues cut by 5% this year and next year and a company tax shortfall of $700 million this year and $2.8 billion in 2020-21.
Some of the bleak news was helpful though, with falling global interest rates due to economic fears helping to cut the interest bill on debt by $446 million this year and $3.8 billion over the next four years.
That better than expected result came about even with the government holding more debt than anticipated because of the lower surpluses, which are $22 billion lower than originally predicted over the next four years.