Bleak forecast for the lucky country

Diminishing capital expenditure in mining is expected to drag on growth.
Diminishing capital expenditure in mining is expected to drag on growth.

The Australian budget bottom line is looking bleak, and a weaker economy isn't going to help the situation.

The 2013/14 federal budget deficit has risen to US$47 billion ($57 billion), from a US$30 billion deficit forecast just before the September election, according to the mid-year economic and fiscal outlook.

The year-average gross domestic product for 2014/15 is expected to grow by 2.5 per cent, compared to 3 per cent in the pre-election fiscal outlook.

Unemployment is expected to rise to 6 per cent in fiscal 2013/14 and then move to 6.25 per cent in the following three years.

RBC Capital Markets senior economist Su-Lin Ong said the revised economic forecasts make for sobering reading.

"Growth is expected to remain well below trend for the next two years, with cuts to nominal GDP capturing the further likely decline in the terms of trade," she said. "The increasing drag on activity as the mining capital expenditure cycle matures and turns down is evident in the further downward revision to domestic demand."

The Treasury's forecasts are based on there being no change to Government policy but that could change in the May budget.

HSBC chief economist Paul Bloxham said the deterioration in the deficit over the next few years is because of weaker economic growth and increased Government spending.

"Care is needed to put Australia on a path to medium-term fiscal balance, without unduly tightening policy at a time when growth is still below trend."


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