Unemployment, deficit go up, rates down

It's a good thing official interest rates might be cut next week.

It's a good thing official interest rates might be cut next week.

The federal government's economic update released on Friday was hardly a vote of confidence in the economy, as Australia prepares for a possible election in September.

Unemployment is expected to jump to 6.25 per cent this financial year and next - a level not seen at any time during the global financial crisis.

In fact, the last time Australia got near that level was 6.2 per cent in December 2002.

Economic growth was downgraded to 2.5 per cent for 2013-14 before optimistically recovering to 3 per cent a year later.

Despite the potential for a lower Australian dollar to add to price pressures down the track, inflation is expected to fall - which would presumably allow the central bank to keep cutting rates.

The cash rate is currently 2.75 per cent and could fall to a very low 2.50 per cent next week, if the Reserve Bank of Australia moves, as it is widely expected to.

One risk is there might not be much ammunition left in the monetary policy armoury in future years.

The biggest shock in the government's statement was the blowouts in the budget deficits.

This year's shortfall is now predicted to be $30.1 billion - not $18 billion.

The following deficits are also bigger than forecast, and the so-called budget balance for 2015-16 has been ditched.

But the goal of a surplus in 2016-17 remains intact, albeit smaller at $4 billion.

These numbers update the forecasts in the May budget made barely three months ago.

It's hard to have any confidence in their longevity. But Treasurer Chris Bowen defended his department's methodology.

"I've not seen any methodology or any approach which is superior to the Treasury's in a volatile and difficult economy," he said.

The update doesn't point to the traditional "election war chest" of past polls.

But Mr Bowen expects voters will appreciate Labor being "upfront and honest" about the challenges ahead.

"We are calling it as we see it," he said.

Let's hope the RBA agrees.

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