In what has now become a well-established ritual under both sides of politics, the end-of-year fiscal and economic update has revealed a slump in revenue and a revision to overly optimistic budget forecasts that have blown out the deficit and delayed the return to surplus. The Mid Year Economic and Fiscal Outlook for 2015-16, released earlier today in Perth, shows the government’s fiscal position continues to deteriorate. The 2015-16 deficit is now expected to be $37.4 billion, up $2.3 billion from May, and the return to surplus has been pushed back to 2020-21. The total of combined forecast deficits in coming years is now $108.3 billion, up from $82.2 billion in the budget.

That means that our overall fiscal position has barely improved since Joe Hockey loaded up the 2013-14 MYEFO with spending in an effort to blame Labor for hiding the true state of the budget — and has deteriorated significantly since the 2014-15 budget.

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The deficit blowout is driven by a further fall in tax receipts that leaves the budget nearly $31 billion poorer over four years; from the 2014 budget to now, forecasts for this year’s tax receipts have deteriorated by $17 billion.

As long foreshadowed, Treasury downgraded its GDP forecasts from May of 2.75% growth this year to a more plausible 2.5%, while 2016-17 is also down a half of a per cent to 2.75%. Projections for the last two years of forward estimates are down from a wildly optimistic 3.5% to just 3%. Unemployment, however, has also been revised down: the budget forecast unemployment to peak at 6.5% this year and stay above 6% into 2016; now it is expected to remain at 6% this year and next. Participation has also been revised up slightly to 65%, reflecting an unexpected improvement in the number of people looking for work this year.

Inflation is expected to remain subdued, with May’s forecasts revised downward to just 2% and 2.25% this year and next, although Treasury has left wage price index forecast at 2.5% this year (and actually lifted its forecast for 2016-17). Nominal GDP, too, has been revised downward from 3.25% to 2.75%, which will put revenue under further pressure.

The Commonwealth will take 23.9% of GDP in revenue, slightly less than forecast in May but still 0.4 points higher than 2014-15 last year and the highest level since Peter Costello’s last budget, while spending will remain at 25.9% of GDP, as forecast in the budget, reflecting that Morrison and Mathias Cormann have managed to reduce spending from the Abbott-Hockey excesses that caused it to reach 26.2%.

But the collapse in the terms of trade continues – expected in May to be -8.5% is now forecast to be -10.5%, with the iron ore price now forecast to be $39 a tonne, rather than the budget forecast of $48.

The spending cuts in the statement are small in scale and will be targeted at welfare recipients and health, with new integrity measures forecast to earn $704 million over three years from next financial year. There’ll also be a total of over $1 billion cuts in health programs in areas such as GP incentives and workforce programs.

The key economic forecasts at a glance:

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Peter Fray

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Peter Fray
Editor-in-chief of Crikey