Australian economy far from recovered, as budget deterioration tipped to continue without major changes: IMF

Australia’s budget has deteriorated faster than any other developed nation’s in the past six months, as Treasurer Joe Hockey continues to prepare Australians for a tough May budget.

Just over a month away from the budget, the International Monetary Fund’s Global Financial Stability Report released yesterday suggests a need for taxation changes in order to reel in the budget deficit.

According to The Australian Financial Reviewthe budget would need to improve by at least $50 billion by 2020 to bring gross debt down to 70% (or 4.7% of GDP).

Speaking in Washington yesterday, Hockey said IMF estimates showed Australia’s increased healthcare and pension spending alone, unless changed, would cost an extra $93 billion of government spending per annum by 2030.

“That is the equivalent of an extra $61 billion a year in today’s dollars or the equivalent of an extra 4% of today’s GDP,” he says.

To pay for the ageing population, Hockey says Australia will need to raise the equivalent of the existing company tax, indicating major changes will be needed to Australia’s taxation system.

Hockey says with the current budget deficit and below trend growth, there could be budget deficits for the next decade.

“We are now grappling with growth stubbornly below trend as our economy rapidly transitions from the end of the resources investment boom, with rising unemployment and a deteriorating budget position,” he says.

The latest figures from the IMF’s Global Economic Outlook report released earlier this month show Australia is still struggling to recover from the slowdown in mining-related investment.

The Australian economy is tipped to remain 0.5 percentage points below the trend growth rate of 3% to 3.25%. The IMF predicts Australia’s growth will remain “broadly stable” at 2.6% in 2014.

In 2015, GDP is only tipped to have increased 0.1 percentage point to 2.7%.

JP Morgan chief economist Stephen Walters told SmartCompany Australia has struggled to adjust to the post-mining boom.

“However, in context we’ve had the biggest boom we’ve seen in 120 years, so it’s not a surprise we’re having an adjustment period,” he says.

“As other economies come out of a recession, in this context we seem sluggish, but we’ve avoided having a recession for 23 years.”

Walters says JP Morgan is anticipating Australia to grow at 2.75% this year and 3% in 2015.

“Our estimates are a bit below the Reserve Bank of Australia’s estimates. We think the economy is still in an adjustment period… and when an economy goes through an adjustment, some sectors of the economy shrink by comparison. This is being seen in manufacturing and mining,” he says.

“The economy will start to pick up though, and growth numbers are expected to be higher each year. By 2016 things will be looking better. There will be boosts to exporting markets and consumer spending and construction will be strong.”

Walters says looking forward Australia’s biggest challenges will be recovering from a high exchange rate and managing the relationship with China.

“There has been a big hollowing out of the economy, with the exchange rate being too high for many businesses such as the car manufacturers and SPC Ardmona,” he says.

“[In the budget] welfare looks like an obvious target to hit. Also on the agenda will be negative gearing, the pension age and in the long term possibly GST.”