• The government’s economic forecasts now recognise the softness of the domestic economy and the weaker outlook for commodity prices and incomes. In the near term the Budget now looks to be slightly adding to growth (rather than detracting as at Budget time).  To get back to surplus (one year later) in 2016/17 however requires a sharp structural tightening in the out years.
• In the near term our forecasts are a touch lower than even the revised estimates (NAB 2 ¼% Government 2 ½%) which, with similar terms of trade forecasts, translates to lower nominal income and hence downside risk to revenue. Also, domestic demand forecasts for this year appear very optimistic given the state of the economy.
• However, Government projections for the out-years appear even more optimistic – especially for the labour market with unemployment falling from 6 ¼% to 5% in 2015/16.  While a technical assumption these have big implications for outlays.
• Treasury has revised its global forecasts down as well, still expecting faster growth next year but we have concerns about their China forecasts.
• Given the above there must remain serious doubts about the prospect of a surplus even on the new timetable.
• The main policy measures were largely as expected / leaked and included: increases to tobacco excise; motor vehicle FBT; the Financial Stability levy; more pressure to cut costs in the public service (“efficiency dividend”); a further delay in the overseas aid schedule and, on the other side, the impact of a lower carbon price.

For further analysis download the full report.

• Government Downgrades Outlook: tightens policy – 2 August 2013 (PDF 162 KB)