Given the collapsing terms of trade, the $10.6 billion blowout in the budget deficit over the past six months was to be expected. What may have surprised is how relatively sanguine Joe Hockey appears to be about his rapidly deteriorating bottom line.
With tax receipts expected to be down $6.2bn this financial year and almost $32bn over the next four years, welfare spending blowing out in a slowing economy and the big structural savings in health, social welfare and education stymied by the Senate, the surplus previously forecast for 2017-18 is now expected to be a $11.5 billion deficit.
Over the forward estimates there has been a $43.7bn deterioration in the forecast budget outcomes and the new projections indicate that the elusive surplus won’t be achieved until 2019-20.
Yet Hockey’s tone was more upbeat than the apparently gloomy set of numbers might have warranted.
That might be partly because, despite the steep decline in revenue and the Senate’s obstructionism, the Abbott government has been reasonably disciplined in its spending, largely offsetting new spending with reductions to existing programs (most notably foreign aid programs).
It might also be that while at the moment it might appear that the budget faces only headwinds, next year there may be some more helpful influences.
The lower dollar, the lower oil price, a surge in infrastructure spending and, perhaps, even lower interest rates should put some kind of floor under activity levels and rekindle some growth in non-resource sectors of the economy previously throttled by the strength of the dollar.
The official forecasts are for real GDP growth of 2.5 per cent this year, strengthening to 3 per cent in 2015-16, although nominal GDP for 2014-15 is expected, thanks to the collapse in commodity prices, to be only 1.5 per cent – the lowest level of nominal GDP growth in more than half a century.
The deficit itself is, of course, stimulatory. That’s why economists and Treasurers refer to 'automatic stabilisers'.
As with the May budget, Hockey has made it clear that the government isn’t going to respond to the deteriorating in the fiscal outcomes by trying to offset them with near-term cost reductions that could drive a weakening economy into recession.
As it is the unemployment rate is expected to edge higher, from 6.25 per cent to 6.5 per cent over the next two financial years.
The fiscal strategy has always been about treading fairly gently while the economy is vulnerable, with the structural changes to spending Hockey put forward in May designed to provide a medium to long term glide-path back to surplus and lower Commonwealth debt.
One positive that Hockey could point to is that, where last year’s mid-year economic outlook had Commonwealth debt reaching $667bn in 2023-24 and continuing to rise, this year’s statement anticipates debt of just under $500bn in 2023-24 and for debt levels to be falling.
That medium-term improvement in deficits and debt remains the strategy, even though the execution is proving difficult, thanks to the external circumstances and an intractable Senate where, as Hockey is fond of pointing out, Labor is even voting against cost-savings measures that it proposed to introduce while it was in Government.
Hockey attributed $3.4bn of the budget blow-out to the Senate delays while also saying that the price of getting measures through the Senate (mainly to get the support of the cross-benchers for the repeal of the mining tax) was $7.2bn over the forward estimates. He still has $34bn of measures tied up in the Senate.
Labor, naturally, takes great delight in seeing Hockey experiencing the same kind of revenue losses (and Opposition frustration) that plagued Wayne Swan during a lengthy term as Treasurer that produced nothing but burgeoning debt and deficits.
In Labor’s case, the fall-off in the rate of revenue growth did, however, coincide with significant growth in spending -- some very large lumps of which (in health and education) were locked in beyond Swan’s forward estimates and left for the Coalition to fund.