The Australian federal government should not "sugar-coat" the depth of the long-term challenges facing the nation, commentator Access Economics said today.
While it expects better news on the budget in the short term, it believes Treasury will downgrade budget deficit projections from previous estimates made during the boom times of 2007.
Access modelling projects a budget deficit of 5.7 per cent of gross domestic product (GDP) by 2046/47, larger than both the 3.5 per cent estimated in the second Intergenerational Report (IGR2), and the five per cent deficit in IGR1 that was for the 2041/42 financial year.
This would mean a far bigger deficit than the $57 billion forecast for the 2009/10 financial year at only 4.9 per cent of GDP.
"That is worse than the official Intergenerational Report is likely to say," Access Economics economist Chris Richardson said in his latest Business Outlook released today.
"But soon somebody needs to start telling it like it is and taking some hard budgetary decisions."
Treasurer Wayne Swan said last month he would be releasing IGR3 before the next budget, while flagging a substantial increase in projected population growth.
Richardson said Treasury is also assuming the government will make a series of unspecified spending cuts to the tune of $20 billion a year, but that is before it does its usual analysis of future spending trends.
Richardson believes IGR3 will assume away "much of the problem it is meant to be analysing".
"The future will be tough enough without sugar-coating it, making it hard for the public to realise the depth of the challenge we face," he said.
IGR2 released in 2007 claimed future fiscal finances were looking healthier than the first report released in 2002, despite a series of tax cuts and spending increases.
However, IGR2 was prepared during a boom.
"It therefore assumed that the boom-time revenues were permanent. That was too optimistic, and the imminent IGR3 won't be as sanguine," Mr Richardson said.
"Yet chances are that it will still notably underestimate future costs."
However, Richardson expects better news on the budget position in the short term.
He said deficits won't be as "scary" as those projected in the May budget because of Australia's smaller than expected economic downturn.
He expects the $57 billion deficits forecast for both 2009/10 and 2010/11 will be closer to $50 billion, while the $44 billion for 2011/12 will be nearer to $40 billion.
He expects the deficit for 2012/13 will be $24 billion instead of $28 billion.
He is also forecasting an unemployment peak of 6.8 per cent instead of the 8.5 per cent predicted in the May budget.
"The better than expected performance of Australia's economy is combining with the better than expected performance of China's economy to materially change the outlook for company taxes," he said.
He said China's rebound has seen commodity prices recover rapidly, and while corporate profits have fallen 20 per cent in the past nine months, they may soon hit a firmer floor than appeared likely earlier in 2009.
"That implies some very substantial savings to be made in the budget outlook," he said.
He expects the mid-year budget review to be released in November.
- AAP
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