Today, the Treasurer, Chris Bowen MP, and the Minister for Finance and Deregulation, Senator Penny Wong, released the Government's Economic Statement, detailing the short and medium‑term economic outlook facing Australia, the challenges ahead, and the path to budget surplus in 2016-17.
The Economic Statement shows that despite significant downgrades to tax revenue due to lower terms of trade, falling commodity prices and other factors, the Government has a clear path to return the Budget to surplus within the forward estimates.
At the same time the Government is adopting a fiscal position in the short term that supports jobs and is implementing new policy priorities to lift productivity, economic growth and Australian living standards.
The Economic Statement is a clear, detailed and up-front assessment of Australia's economic position. It provides a transparent account of the Labor Government's fiscal strategy and policy priorities, and how this strategy will be implemented in coming years to ensure continued growth and prosperity for all Australians.
Economic growth easing as Australia undergoes transition
Australia's economic fundamentals remain strong and the outlook remains positive, with solid growth, moderate unemployment and contained inflation.
The transition in the resources sector from a record investment boom to strong growth in production and exports is currently under way. This will mean that non-mining sectors of the economy will need to lead growth in the future.
This transition poses challenges for the economy. But these are challenges that the economy is in a good position to meet and that can be managed through the Government's fiscal strategy and broader economic reform agenda.
The drivers of the economic transition under way have accelerated since the last Federal Budget.
The terms of trade have been revised down significantly as mineral and energy commodity prices have fallen more quickly than expected in response to increasing supply from Australia and other countries and lower expected growth in China. Nominal GDP is now forecast to increase by 3¾ per cent in 2013‑14 and 4½ per cent in 2014‑15, well below its 20‑year average of 6½ per cent.
Real GDP growth is now expected to be 2½ per cent in 2013‑14 and unemployment is expected to increase to 6¼ per cent. However, in 2014‑15, economic growth is expected to strengthen to 3 per cent. Low interest rates and a lower exchange rate will continue to support growth in the non‑resources sectors of the economy, but a refocused effort on productivity-enhancing reforms will also be needed to ensure our continued prosperity.
Returning to surplus in 2016-17 in a measured and responsible way
Lower than expected nominal GDP growth has had a major impact on expected tax receipts and other revenue, which have been revised down by $33 billion over the forward estimates.
The Government remains committed to the medium term fiscal strategy that has guided Australia's strong economic performance in recent years. This includes our successful response to the global financial crisis, which saw Australia avoid recession during the worst global downturn since the Great Depression.
This strategy provides the basis for the Government's decision to both support jobs and growth in the short term by largely absorbing the fall in forecast revenues, while charting a course for a return to surplus to keep Australia's fiscal position sustainable.
With the economy currently facing a period of transition and falling terms of trade, budget cuts in the near term to offset the lower than expected revenues would put growth and jobs at risk. Protecting growth, employment and essential services in the immediate future has meant the Government has allowed the downwards revisions in expected revenues in the short term to flow through to the budget balance.
Not doing so would be to accept a policy of excessive austerity that would exacerbate, not mitigate, the economic challenges Australia faces and it would hurt businesses, households and the nation's future prosperity.
With the impacts of the terms of trade and economic transition expected to fall most strongly in the next two years the expected deficit in 2013-14 is now $30.1 billion, and the expected deficit in 2014‑15 is now $24 billion.
Returning the budget to a modest surplus of $4.0 billion in 2016-17 is appropriate given Australia's strong economic fundamentals, and supports medium term budget sustainability and longer term prosperity.
Responsible savings to maintain Australia's fiscal strength
The Government has made $17 billion of responsible and necessary savings decisions to provide a pathway to surplus in 2016-17. The majority of the required consolidation will occur in 2015‑16 and 2016‑17 when the economy is expected to return to more balanced growth.
The staged increases to the rate of tobacco excise will help return the budget to surplus, while also improving the health of Australians by reducing tobacco consumption, prevalence and smoking related harm.
The public service efficiency dividend will be increased to 2¼ per cent per annum for the three years from 2014‑15, continuing the Government's record of driving higher efficiencies in the public sector.
While decisions on how the efficiency dividend is applied are properly a matter for heads of departments and agencies, we have a strong expectation that agencies will first look at non‑staffing activities before considering staff reductions.
The ATO will also be given additional resources to address ongoing levels of tax debt and unpaid superannuation. Collecting unpaid entitlements like superannuation will boost workers' superannuation savings and help them achieve a more comfortable and dignified retirement.
The Government is progressing a recommendation from the Council of Financial Regulators, by establishing a dedicated Financial Stability Fund to strengthen Australia's financial crisis response capability. The Fund will be used to protect deposits, including those covered by the Financial Claims Scheme.
Growth in Official Development Assistance will also be reduced over the forward estimates. However, we will still meet our target of 0.5 per cent of GNI being spent on aid in 2017-18.
A new national competitiveness agenda
To ensure that the economic transition is as smooth as possible and new sources of growth are supported, we must build upon Australia's strengths as an open, flexible and competitive economy.
However, we are likely to face a period with falling export prices for a number of years. In these circumstances, higher productivity growth will be the key to ensuring a smooth transition to new sources of growth, improving living standards and longer term prosperity.
In recognition of this, the Government has committed to a new National Competitiveness Agenda to lift productivity, economic growth and living standards for all Australians. The Government is working cooperatively with business and the unions to lift Australia's annual productivity growth rate to 2 per cent or better.
The statement is available on the Budget website.
2 August 2013