The 2015 Budget: Political, Social & Economic Challenges Lie Ahead

While Australia’s current budgetary and economic conditions remain relatively strong, significant challenges lie ahead.

The 2015 Budget made abundantly clear that the Australian economy faces many more challanges than at first glance. 

 Australia currently retains a triple A credit rating from all three of the major rating agencies. Unemployment is low and expected to peak at 6.5% in 2015-2016 and decline thereafter. However, China’s slowing growth is impacting Australian commodity prices and government revenues. Additionally, Australia’s aging population and increasing health costs places long term strains on the budget.

The Federal Government’s approach in the 2015-16 budget has been to reduce the pace of fiscal consolidation. A $3.5 billion childcare package and small business package of $5.5 billion are centrepieces in a political and economic sense.

The deficit for 2015-16 is $35.1 billion and the budget is not projected to return to surplus within the forward estimates. This in and of itself is not problematic. A budget, however, is a document of forecasts and is thus inherently uncertain. The path towards surplus is built upon highly optimistic assumptions about growth rates. The government’s Intergenerational Report estimated that GDP growth would be 2.8 per cent over the next 40 years. This budget, however, estimates that growth will be 2.75 per cent from 2015-2016, 3.25 per cent in 2016-17 and 3.5 per cent thereafter. Accordingly there are questions about the accuracy of underlying cash balance projections.

The political environment also remains volatile. The Parliamentary Budget Office identified that unpassed savings from the 2014 budget will cost over $112 billion over the next 10 years. The extent to which any revised budgetary strategy will pass into law across 2015-2016 remains highly uncertain.

It follows that there are significant questions about the sustainability of commonwealth finances and, by implication, the maintenance of Australia’s Triple A credit rating into the future.

Written by Tim Cargill, Edited by Andrew Graham