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The budget deficits that won't go away

AAP logoAAP 24/11/2016 Colin Brinsden, AAP Economics Correspondent

Whatever successes the Turnbull government enjoys during the final parliamentary sitting week of the year, signs are it will head into Christmas with bigger budget deficits.

Despite a spectacular rise in commodity prices over the past few months and the potential boost to national income, it isn't going to be enough to offset the drag on tax revenue from the slowest wage growth on record and an underperforming jobs market.

Treasurer Scott Morrison will hand down his mid-year budget review on December 19.

According to one independent estimate, since the May budget the deficit has deteriorated by $24 billion over the next four years.

That puts the government's projection of a return to surplus by 2021 in jeopardy and, more importantly, increases the risk of Australia losing its top-tier triple-A credit rating.

A downgrade would result in higher interest rates as banks pass on to customers increased funding costs when tapping offshore markets, while putting a dent in confidence.

Against this backdrop, the latest Newspoll found confidence in Malcolm Turnbull's ability to manage the economy fell below 50 per cent for the first time.

The prime minister went to the July election on a promise of jobs and growth.

Yet recent figures show that jobs growth has been flat at best since the May budget, while annual wages growth of 1.9 per cent is shy of government predictions.

Furthermore, data so far contributing to the national accounts for the September quarter suggests the economy has hit a soft spot.

The report released on December 7 will help Treasury form its forecasts for the mid-year budget review.

Construction figures this week showed weakness across the board and will probably subtract 0.5 percentage points from growth in the September quarter.

It puts at risk the preliminary forecasts of economists for the September quarter domestic product growth ranging from a low of 0.1 per cent .

It probably means annual growth will slip below three per cent when earlier weak retail spending figures for the same period is taken into account, although a range of numbers is yet to be released.

So while the domestic economy is working against the budget, external demand for key bulk commodities is softening the blow.

Commonwealth Bank of Australia estimates the iron ore price is up 26 per cent since mid-year, while prices for coking (235 per cent) and thermal coal (86 per cent) are significantly higher than assumed in the May budget.

On their own, and assuming a conservative 30 per cent increase in non-rural prices on average over the year, this would reduce the 2016/17 budget deficit by $6.6 billion.

But Deloitte Access Economics in its traditional pre-budget update analysis not only doubts the commodity price rise will be sustained but also says they do not translate into higher profits - and in turn higher tax returns - for miners because they would still be offsetting loses racked up from recent years.

The treasurer insists commodity prices can't be relied on to be a slave to fix the budget and should not be used as an excuse to deal with expenditure.

He's put the onus on parliament, and especially Labor, to pass the government's savings plan, otherwise the tripe-A rating will be at risk.

Labor says the treasurer should stop making excuses and get on with his job to protect the rating.

The government is halfway through implementing its $40 billion budget repair program, which includes unlegislated measures stretching back years.

But Morrison has made no suggestion he will undertake further measures at this stage should the budget position have worsened since May, as predicted by Deloitte.

"The mid-year economic statement is simply that, it's an update, it is not a mini budget," he says.

The budget provided a trajectory back to balance in 2021, but Morrison admits there was a risk of this projection slipping further out in "uncertain times' for the economy.

"I''m not one like others in the past, like (former Labor treasurer) Wayne Swan, who made bold promises about these things." he said.

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