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Federal budget 2016: Deficit $21b worse, despite iron ore rise, says Deloitte

Chris Richardson: ”That’s not cavalry coming over the hill: they’re pixie horses.” Photo: Glenn Hunt The iron ore boost may be temporary, says Deloitte. Photo: Michele Mossop
Nanjing Night Net

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The government’s budget position has deteriorated $21 billion in the past four months, despite the resurgent iron ore price, a new analysis has found.

The Deloitte Access Budget Monitor finds that a higher than expected dollar, more sluggish than expected wage growth, and new spending commitments have detracted more from the budget position than the higher iron ore price will add.

The starting point for the 2015-16 budget deficit is $38.6 billion, rather than the $33.7 forecast in the last official update in December.

The Deloitte forecasts add between $4 billion and $5 billion to each of the deficit forecasts for 2015-16, 2016-17 and 2017-18, and $7 billion to the forecast for 2018-19.

“It is true that spot iron ore and coking coal prices are about $A15 more per tonne than in the December update,” says the report’s author, Chris Richardson. “But that’s not cavalry coming over the hill: they’re pixie horses.

“Yes the iron ore boost is welcome, but some of it may be temporary, and there are other challenges. Total tax collections are expected to undershoot Treasury expectations by $3.5 billion in 2017-18, and then by a further $4.1 billion in 2018-19. And, in an election year, the government has already reversed some previously announced spending cuts.

“So, based on newly announced policy, we expect spending to be around $1 billion more than the official forecasts in 2017-18, growing to $2.5 billion in 2018-19.”

Among the extra spending measures identified by Deloitte Access are an extra $2.9 billion over four years in grants to the states for hospitals; $760 million in additional defence funding; $520 million and $580 million to retain the Clean Energy Finance Corporation and the Australian Renewable Energy Agency; and $750 million to add hepatitis C medications to the Pharmaceutical Benefits Scheme.

“Our problem is that the temporary boom was accompanied by permanent promises,” the report says. “Some, such as the National Disability Insurance Scheme, will mount very rapidly.

“That doesn’t say we shouldn’t pursue worthy goals, we should. But our social compact remains quite badly broken. At the same time the economy is doing few favours for the tax take, a bunch of policy promises are still ramping up in cost.”

Mr Richardson said the Treasury and the Department of Finance should “level frankly” with voters in the pre-election fiscal outlook to be released during the campaign, publishing their own assessment of whether many of the claimed savings were likely to be achieved, particularly the $80 billion of savings in grants to the states pencilled in to the 2014 budget.

“Treasury and Finance can stick their heads in the sand again, thereby ensuring the electorate does the same,” he said. “Or they can tell it like it really is to all Australians ahead of the election, rather than solely to the new government after the election.”

Opposition Treasury spokesman Chris Bowen said the Deloitte forecasts would be a major embarrassment to the government if confirmed in the budget.

“Given the price of iron ore has rallied to its highest level in 15 months in recent weeks, the government has no excuses and should be expected to deliver a better result than this,” he said.

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This story Administrator ready to work first appeared on Nanjing Night Net.