The Government is starting from a deficit of over $50b in preparing its 2009-10 budget. The blowout of nearly $20b from what was only forecast in February will come on top of a $10b deterioration in this year’s deficit.

Worse for the Government, the hunt for savings within the Commonwealth budget is unlikely to make much of a dent in the looming shortfalls, with the bigger deficits driven by collapses in taxation revenue and rises in unemployment payments.

When it released an unprecedented update to its economic and fiscal forecasts in February to coincide with its second stimulus package, the Government revealed a series of huge deficits driven by the collapse in taxation revenue: $22.5b this year; $35.5b in 2009-10, and forecasts of $34.3b and $25.7b in subsequent years. The Government’s two stimulus packages accounted the bulk of this year’s $40+ billion budget turnaround, but the financial crisis had knocked nearly $10b of revenue this year, and lowered estimates for 2009-10 by $20b.

But the MYEFO estimates were based on economic growth and unemployment forecasts that now look over-optimistic, despite seeming realistically unpleasant at the time. Treasury had forecast 5.5% unemployment in the June quarter and GDP growth for the year of 1%, and 7% unemployment in June 2010 and growth of 0.75%.

The collapse in growth since then will put the Government deeper into deficit and, while it has made a range of additional spending announcements in recent months, it is primarily a victim of external circumstances. The biggest decision in its hands will be the likely decision to increase the pension level for the aged and carers — expected to be around $35 a week for single recipients, adding around $5b pa to expenditure. There is no escape from this increase that would not be profoundly damaging for the Government.

Using UEFO figures, we calculated a revised deficit based on additional spending announcements and the impact of lower growth and higher unemployment: 7% unemployment by June and annual growth of 0%, with unemployment rising to 9.5% and growth of -0.5% through 2009-10.

2008-09 $b 2009-10 $b
UEFO deficit -22.5 -35.5
Stimulus package water buyback -0.05 -0.13
Stimulus package “Get Communities Working” fund -0.1 -0.1
New employment assistance -0.03 -0.09
Indigenous health -0.015 -0.015
Australian Apprenticeships Access Program 0 -0.01
Infrastructure employment projects -0.03 -0.12
Unemployment benefits -0.6 -1.03
Pension rise 0 -5
Revenue falls -8.8 -10.4
Deficit -32.125 -52.395

While the impression is of a profligate Government throwing money at the financial crisis and buying off independent senators to pass its stimulus packages, decisions like the additional $500m brought forward for water buybacks at the request of Nick Xenophon make relatively little impact once allocated across financial years and compared to the collapse in revenue from company and personal income tax and the GST.

However, these figures do not include funding for bushfire-related assistance and any direct funding the Government decides to allocate to its NBN project in 2009-10. The Prime Minister made an open-ended commitment — supported by the Opposition — to rebuilding bushfire-affected communities, as well as co-funding with the Victorian Government a range of relatively small programs to assist affected businesses and communities. The only definite funding for the NBN is the $4.7b already allocated for the project; the remainder of the $40+ billion is to come from “Aussie bonds” to fund the Government’s stake, private equity and company borrowings.

The Government also faces pressure to establish parental leave arrangements this year likely to cost around $530m pa. A Defence White Paper will also shortly be released, although the big dollars accompanying likely calls for major additional materiel procurement won’t be in this or the next budget.

Given the collapse in revenue, Finance and Treasury are likely to be looking closely at major tax expenditures. Last year, Treasury estimated likely tax expenditures of more than $68b in 2009-10, including nearly $25b in superannuation concessions. Ending tax rebates, exemptions and concessions, particularly in superannuation, will be politically difficult, but there are no easy decisions in the budget anymore, and there won’t be for several years yet.