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Review a taste for Morrison budgets to come

Business

The mid-year budget review will round off a busy few months for Scott Morrison.

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Since becoming Federal Treasurer he’s finalised responses to David Murray’s financial system inquiry and Ian Harper’s competition law review, helped to produce Prime Minister Malcolm Turnbull’s innovation policy and taken a leading role in the tax reform debate.

Morrison has been keen to play down expectations for Tuesday’s mid-year economic and fiscal outlook, insisting it’s no more than an update of the May budget.

He still has time to stamp his authority on the Treasury portfolio.

And by the time he hands down his debut budget in 2016, there will be better clue to how his tax reform package is shaping up.

But for now, it’s the budget update that’s in the spotlight.

Morrison this week noted major new expenditures racked up since May, totalling at least $4 billion, which have to be covered from savings.

Along with $1.1 billion in funding for an innovation plan, the government has reversed Labor’s bank deposit tax at a cost of more than $1 billion, raised road spending by another billion and increased the humanitarian refugee intake at a cost of $600-700 million.

When Morrison became Treasurer in September, expenditure was at 26.2 per cent of gross domestic product – above a forecast 25.9 per cent.

“It is my job to get it back at 25.9,” he says.

But the economic backdrop is making it difficult.

Treasury already has cut what it sees as Australia’s growth potential to 2.75 per cent – down from the May budget’s forecast of three per cent – as a result of slower population growth and labour market trends.

It’s reasonable to conclude it will take longer to get to a surplus than the 2019/20 forecast in May.

Iron ore prices have also tumbled to below $US40 a tonne when an average of $US48 was the budget forecast.

National Australia Bank senior economist David de Garis says a reduced $US38 forecast would reduce tax receipts in the financial years by $A2.1 billion.

So far this financial year the iron ore price has averaged around $US50.

At the same time, the Australian dollar has averaged around 72 US cents compared with a budget forecast of 77 cents.

De Garis warns of a downward revision to the iron ore price, it might not be that dramatic.

That’s because there will be some adjustment to tax receipts from a lower-than-assumed value of the dollar.

However, Deloitte Access Economics anticipates deficits across the four-year budget estimates to increase by $38 billion, blaming 90 per cent of the deterioration on the impact of an accelerating slowdown in China.

It would mean the 2015/16 budget deficit would be $40.3 billion rather than the $35.1 billion forecast in May.

Morrison says the government’s promotion of innovation and competition, and eventually tax reform, are all aimed at growing the economy and creating jobs.

“The budget will come into balance over the cycle by controlling expenditure, then we must grow the economy because that’s what builds revenues,” he says.

A Treasury briefing handed to Morrison when he took over from Joe Hockey, and released under Freedom of Information, suggests budget repair is not only essential but urgent.

“Regardless of how economic conditions evolve, Australia will be better placed to respond if the budget is in a strong position,” the briefing said.

AAP

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