Tuesday, May 19, 2015

Budget forecast woes ahead

One day on, the budget forecasts are looking frayed.

The Bureau of Statistics reported on Wednesday that wage growth had slipped to a new long-term low of 2.3 per cent. The rate is the lowest this century and well below the budget forecast of 2.5 per cent in this and the next financial years, climbing to 2.75 per cent in 2016-17.


Unless the growth rate lifts, estimates of tax revenue will have to be revised down. The budget papers say weaker than expected wage growth in the past six months "significantly downgraded expected tax receipts".

Tom Kennedy of JP Morgan described the pace as "glacial" and noted that wage growth had decelerated in 10 of the past 11 quarters. Katie Hill of the ANZ Bank said wage growth was "set to remain low in coming years".

Wage growth decelerated in all but two of the 18 industry groups identified by the ABS.

The budget expects interest payments on government debt to climb by just 6.5 per cent in the year ahead, even though debt itself will climb 10.9 per cent. The slower increase is the result of much lower interest rates and an assumption that they will stay low in the decade ahead.

But the budget documents reveals the rate used to generate the forecasts is already outdated.

The budget assumed the 10-year bond rate would stay at 2.5 per cent, a low reached about four weeks ago when the assumptions were chosen. Since then the 10-year bond rate has climbed to 2.9 per cent.

The documents reveal that if a rate of 2.9 per cent had been chosen, public debt interest costs would have been $1.1 billion higher by 2018-19 and $2.1 billion higher by 2025-26.

The next national accounts due on June 3 will provide an insight into the budget's forecasts for economic growth. They are 0.25 per cent higher than those of the Reserve Bank.

The bank has forecast an economic growth rate of 2.5 per cent in 2015-16 while the budget has forecast 2.75 per cent followed by 3.25 per cent in 2016-17.

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