The 2012-13 Mid-Year Economic and Fiscal Outlook (MYEFO) released today shows the fundamentals of the Australian economy remain strong, with the budget returning to surplus this financial year as scheduled, despite worsening global conditions cutting almost $22 billion from tax receipts.
Global growth has slowed in recent months, with the recession in the euro area and the subdued recovery in the United States weighing on growth in our region.
The weaker global outlook and lower than expected commodity prices, along with the general easing of price pressures in the economy, are again slowing the recovery in tax revenue.
This is driving a further write-down in tax receipts of almost $22 billion over the forward estimates, almost all from company tax and resource rent taxes, with a write-down of $4 billion in 2012-13 alone.
Since the start of the Global Financial Crisis, tax receipts have been written down by a total of almost $160 billion.
However, estimates of taxes on wages and consumption remain solid in this MYEFO, reflecting the healthy fundamentals of the Australian economy.
Real GDP is forecast to grow at around trend at 3 per cent in 2012-13 and 2013-14. This is a downgrade of ¼ of a percentage point in 2012-13 compared to Budget, but follows stronger than expected growth in 2011-12.
While global headwinds, a high dollar and changing consumer behavior are weighing on some sectors, the Australian economy is expected to outperform every major advanced economy this year and next, with growth underpinned by strong investment, strong growth in export volumes and solid growth in consumption.
The unemployment rate is forecast to remain low at 5½ per cent in 2012-13 and 2013-14, in stark contrast to the stubbornly high rates of unemployment seen across the developed world.
Both headline and underlying inflation are expected to remain well contained over the forecast period, sitting within the RBA's target band.
While Australia's economic fundamentals remain strong, the recent decline in global commodity prices has contributed to a larger than expected decline in Australia's terms of trade, which are forecast to decline by 8 per cent in 2012-13, compared to a forecast decline of 5¾ per cent at Budget.
Global volatility and substantial revenue write-downs have made returning the budget to surplus in 2012-13 much harder but the Government remains on track to deliver a surplus to help protect against global economic turbulence.
Returning the budget to surplus also gives the Reserve Bank maximum flexibility to cut interest rates, as it has several times in the past year. Interest rate cuts since the Government was elected in 2007 are saving a household with a $300,000 mortgage around $4,500 every year.
The Government has responded to the more challenging global outlook by delivering $16.4 billion in new savings over the forward estimates. These savings strike the right balance, minimising any impact on the economy and on the community's most vulnerable, while still maintaining strong public finances.
While the savings taken will help return the budget to surplus each year over the forward estimates, this MYEFO continues the Government's record of making long-term structural savings to improve the underlying position of the budget over time and help make room for key Labor priorities.
The Government has moved to further reform Private Health Insurance (PHI) rebate costs to control one of the fastest growing areas of health expenditure. The PHI rebate currently costs around $5 billion a year and its growth rate of 6.3 per cent over the forwards is unsustainable.
From 1 April 2014, the premium to which the rebate is applied will move in line with CPI or the commercial premium increase, whichever is lower, ensuring that Australians continue to see their rebate grow every year. The rebate as it currently applies will remain unchanged. This measure will save approximately $700 million over the forward estimates, helping ensure that the PHI rebate remains on a sustainable footing.
At the same time, the Government will provide a record additional $16.4 billion over six years in National Health Reform funding direct to hospitals from 2014-15 and the historic $4 billion over six years for the Dental Health package announced by the Minister for Health.
Further long-term savings include changes to make the Baby Bonus more sustainable and the removal of concessional treatment for 'in-house' fringe benefits if they are accessed through a salary sacrifice arrangement.
The Government is also delivering changes to the way large companies pay their tax, moving from quarterly to monthly installments, better aligning tax payments with the way businesses pay GST and making payments closer to when the income is earned, like wage and salary earners.
As a result of the Government's ongoing fiscal discipline, government payments as a share of the economy are projected to fall by 1.5 per cent in 2012-13 to 23.8 per cent. It is estimated that payments as a share of GDP will remain relatively stable over the forward estimates. This is the longest period in which payments will remain at 24 per cent or less as a share of GDP in over 30 years.
Australia remains on track to return the budget to surplus ahead of all major advanced economies. The average net debt position of the major advanced economies (G7) is projected to peak at 95 per cent of GDP in 2016, almost 10 times higher than the peak in Australia's net debt of 10.0 per cent of GDP in 2011-12.
At a time when several countries are in recession with unacceptable levels of unemployment and high debt, Australia's economy remains the standout of the developed world, with solid growth, low unemployment, contained inflation and strong public finances.
Our economy walks tall in the world as a result of the hard work of millions of Australians and the Government's strong economic management and fiscal discipline.
The decisions taken in this MYEFO were difficult but critical at a time of falling revenues and ongoing global headwinds. We have found savings to minimise the overall impact of the fiscal consolidation on the economy and to do everything we can to protect low and middle-income earners and the most vulnerable in our community.
The MYEFO is available at http://www.budget.gov.au.