With a double dissolution election looming amid calls for a rate cut, treasurer Scott Morrison might be sweating on his first budget a bit more than his predecessor Joe Hockey did a year ago.
Mr Morrison will deliver his first, and possibly last, budget on Tuesday, and his policies will set the scene for much of the upcoming election battle.
Raising the stakes even higher is the risk of an interest rate cut the same day which, if it eventuated would take the cash rate to 1.75 per cent – the lowest level ever recorded.
Consumer prices have fallen for the first time since the global financial crisis, which many economists think will force the Reserve Bank’s hand.
The task of budget repair was central to the Coalition government’s winning election campaign in 2013, but the long-awaited return to surplus is receding further and further into the future.
Deloitte Access Economics expects the budget deficit to blow out to $38.6 billion in the next year, compared to the $33.7 billion forecast in the government’s mid-year fiscal and economic outlook.
JP Morgan economists tip the budget deficit to shrink to $25 billion.
But both agree there’ll be no surplus in sight until next decade.
The federal government has indicated it will not embrace major tax reform, leaving it few tools left to tackle a stubbornly high deficit.
It has rejected changes to the GST, won’t touch negative gearing and has ditched proposed changes to federal-state relations.
Plus the ageing population and bulging health and education outlays bite outside the window of the forward estimates, JP Morgan economists said.
“Moreover, there is also the prospect that the rise in commodity prices is temporary, meaning that the recent uplift in nominal (gross domestic product) growth is unlikely to be sustained,” they said.
Australia’s triple-A credit rating could also be at risk if the government fails to come up with a credible path to a surplus.
JP Morgan doubts economic forecasts will change materially from those published in December’s MYEFO.
If anything, the jobs market forecasts may be improved to reflect a better-than-expected performance in recent quarters, they said.
“We expect the budget to be a little more optimistic on growth in the 2016-17 fiscal year, but less bullish on inflation,” JP Morgan economists said.
PREVIOUS 2016/17 DEFICIT FORECASTS
* Last year’s budget – $25.8b
* Mid-year forecast (Dec) – $33.7b
* Deloitte Access Economics forecast – $38.6b
* JP Morgan forecast – $25b