National debt set to hit limit
Federal Treasurer Chris Bowen unveiled the government's updated economic statement on Friday, revealing a bleaker outlook for the economy as the mining investment boom peaked, commodity prices fell, the terms of trade declined and the Chinese economy lost steam.
Growth was estimated to slow to 2.5 per cent this financial year, down from the May budget forecast of 2.75 per cent, while the unemployment rate was expected to rise to 6.25 per cent in the next two years.
"We are being realistic and laying out that there is a softening that affects both growth and employment," Mr Bowen said.
Economists welcomed the lower growth forecasts for the next two financial years, which they said came closer to market expectations, but said the forward estimates in the outer years remained improbable.
"The estimates beyond 2014-15 appear unrealistic, with employment growth too weak to reduce the unemployment rate to 5 per cent," NAB economists said.
They said there were questions about whether the government would be able to return the budget to surplus by 2016-17, given the "unrealistic economic parameters".
UBS chief economist Scott Haslem criticised the government for its forecasts and missed budget targets, saying it was a "destabilising force" for the economy. "At some point, those controlling the fiscal purse need to realise the consistent inability to hit budget figures is increasingly due to flawed revenue forecasts and higher spending decisions, and less to do with a soft economy," Mr Haslem said.
The economic statement revealed a budget deficit blowout of $30.1 billion for the 2013-14 financial year, a sharp increase from the previous May budget estimate of $18 billion. The 2014-15 deficit estimate was revised to 24 per cent.
The blowouts were not expected to threaten Australia's triple-A credit rating, as credit rating agencies could tolerate near-term deficits if there were realistic middle-term efforts to balance the budget, TD Securities head of Asia-Pacific Research Annette Beacher said.
Government revenue was expected to reduce by about $8 billion a year for a four-year total of just over $33 billion. The resource rent tax was expected to come in $560 million lower. Major revenue measures included a tobacco tax increase, a bank deposit levy and a public service efficiency dividend.
Net government debt was set to peak at 13 per cent of GDP, a rise from the 11.4 per cent peak projected in the May budget.
Australia's debt ceiling was forecast to be reached by December 2013, so an incoming government would have to legislate to lift it.
Commonwealth government securities are forecast to rise to about $350 billion by April 2015, and to $370 billion by April 2016, the government said.
The total Commonwealth government securities on issue as of Friday stood at $263 million.
Frequently Asked Questions about this Article…
The article says Australia was forecast to reach its debt ceiling by December 2013, meaning an incoming government would need to legislate to lift it. For investors, that creates potential policy and market uncertainty because the government may issue more debt and consider revenue or spending changes to manage the situation. Credit agencies may tolerate short-term deficits if there are realistic middle‑term plans to balance the budget.
The government's updated economic statement revealed a $30.1 billion deficit blowout for 2013–14, up from the May estimate of $18 billion, and a revised 2014–15 deficit estimate (described in the article as revised to 24 per cent). For investors, a wider deficit typically means the government will borrow more, which can affect bond issuance, interest rate expectations and fiscal policy decisions that influence markets.
According to TD Securities head of Asia‑Pacific Research Annette Beacher, the deficit blowouts were not expected to threaten Australia’s triple‑A credit rating. Rating agencies could tolerate near‑term deficits if the government shows realistic middle‑term efforts to return the budget toward balance.
The government forecast Commonwealth government securities to rise to about $350 billion by April 2015 and $370 billion by April 2016. The article also reported total securities on issue at $263 million as of that Friday. More securities issuance generally means more government borrowing, which can influence bond yields and the fixed‑income market that many investors follow.
Major revenue measures listed in the statement included a tobacco tax increase, a bank deposit levy and a public service efficiency dividend. The statement also forecast resource rent tax receipts to be about $560 million lower. These measures affect government revenue and could have sectoral impacts (for example, on tobacco and financial sectors) and on overall fiscal balance that investors watch closely.
The government cut growth to an estimated 2.5 per cent for the financial year (down from a 2.75 per cent May forecast) and expects unemployment to rise to 6.25 per cent over the next two years. The downgrade was linked to a peaking mining investment boom, falling commodity prices, weaker terms of trade and a slowing Chinese economy. Slower growth and higher unemployment can weigh on corporate profits, consumer demand and market performance—key factors for investors.
NAB economists said estimates beyond 2014–15 looked unrealistic, arguing employment growth was too weak to bring the unemployment rate down to 5 per cent. They questioned whether the government could return the budget to surplus by 2016–17 given what they called 'unrealistic economic parameters.' UBS chief economist Scott Haslem also criticised the forecasts and missed budget targets, calling the situation a 'destabilising force' tied to flawed revenue forecasts and higher spending decisions.
The economic statement forecast government revenue would fall by about $8 billion a year, totaling just over $33 billion across four years. As a result, net government debt was set to peak at 13 per cent of GDP (up from the 11.4 per cent peak projected in May). For investors, lower revenue and higher debt levels usually mean increased government borrowing and a greater role for fiscal policy in financial markets.
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