Australia budget deficit blows out on commodity price hit

Slumping commodity prices and lower tax receipts will see Australia`s budget deficit balloon to Aus$37.4 billion (US$27.2 billion) this year, Treasurer Scott Morrison said Tuesday as he downgraded economic growth forecasts.

Australia`s resources-driven economy has enjoyed more than 20 years of growth but it is now transitioning out of an unprecedented mining investment boom, and the going has been bumpy with revenues under pressure.

The conservative government`s mid-year economic update showed the deficit this financial year will blow out from the Aus$35.1 billion forecast in the May budget, when Joe Hockey was treasurer.

This is largely due to falling commodity prices, especially iron ore which accounts for a large part of the nation`s export income and now stands at around US$38 per tonne -- US$10 lower than the average predicted in May.

Slow wages growth also contributed, hammering tax receipts.

The government had previously aimed to return the budget to balance in 2019-20, but has now pushed this back a year.

Economic growth is projected to come in at "a more realistic" 2.5 percent in 2015/16, a quarter of a percentage point lower than the previous estimate, and is expected to be 2.75 percent in 2016/17 -- a significant deterioration from the 3.25 percent forecast in May.

However, unemployment forecasts rebounded in one of the few bright spots, with the jobless rate set to peak at six percent next year instead of the previously expected 6.5 percent."Despite revenue writedowns of Aus$34 billion caused by falling commodity prices, a declining terms of trade, weaker global growth and the adoption of more realistic domestic growth outlook, we continue patiently and responsibly on the path to budget balance," said Morrison.

"I want to stress those words: Patiently and responsibly.

"We need to take a safe and careful route and one that does not put at risk our jobs and growth," he added.

"Our plan is straightforward -- responsibly restraining expenditure while supporting economic growth to lift revenues."

HSBC chief economist Paul Bloxham said the mid-year update repeated the "pattern of continued budget disappointment".

"There will be a formidable challenge in terms of getting back to an eventual budget surplus," he said. "A lot can happen between now and 2020/21 -- anything can happen."

Morrison said major savings on welfare cheats and changes to family day care and aged care would help offset much of the new spending since the budget, including Prime Minister Malcolm Turnbull`s recently announced innovation agenda and an increased humanitarian refugee intake.

ANZ said in a research note the government had rightly taken remedial steps to offset new policy expenditure with savings.

"The government has not fully offset softer revenue though, which is why the deficit widens," it said.

"At a time when national income is being damaged by softening commodity prices, this is likely a wise course of action. To have tightened fiscal policy or even left it in neutral would have placed most of the burden of lower commodity prices on the private sector."