Federal budget 2015: Economic outlook good, though forecasts conservative

Australia’s economy is growing at 2.5 per cent today, but in two years’ time its growth rate will supposedly shoot to 3.25 per cent.

Non-mining business investment, on which the Abbott government is putting so much stock for the economy’s future health, will surge to 7.5 per cent from its currently very low 2 per cent.

And household consumption – that driver of retail sales and inflation – will jump to 3.25 per cent, from today’s 2.75 per cent.

Sound believable? Treasury officials think it is. In the budget lock-up on Tuesday, they were privately saying the numbers described a “moderate outlook”, meaning they reckon their forecasts are conservative.

Based on where Australia sits in its economic cycle, with so much spare productive capacity lying idle, both history and theory suggest that all those numbers will start to pick up considerably, Treasury officials say.

They believe businesses will start to invest much more than they have been, and they will be playing catch-up to such an extent that non-mining investment will overshoot its long-run average annual growth rate of 6.7 per cent to hit 7.5 per cent in 2016/17.

It will have to do that, because mining investment is falling precipitously: the budget is forecasting that mining investment growth will contract by a huge 25.2 per cent this financial year, and by an even bigger 30.5 per cent in 2016/17.

Non-mining investment will have to pick up quickly.

But it is hard to imagine that happening at the moment, because business and consumer confidence – that elusive beast frustrating everyone from the Reserve Bank to Treasury to government – shows little sign of picking up.

And if it doesn’t pick up then who knows what to do? Treasurer Joe Hockey knows it has to happen.

That’s why he has used this budget to give small businesses a surprise gift: for the next two years, they will be able to claim an immediate tax deduction for every item they purchase up to $20,000.

“Cars and vans, kitchens or machinery … anything under $20,000 is immediately 100 per cent tax deductible from tonight,” he said in his budget speech.

He has also cut the small business company tax rate from 30 per cent to 28 per cent, “the lowest small business company tax rate in almost 50 years”.

The Abbott government knows business owners need some encouraging. Their animal spirits need to be set free.

But the government’s relying on Treasury’s forecasts for its estimates of government revenue, and for its preparations for the politics of budget deficits.

That’s where Treasury’s technical assumptions come into play.

Treasury is assuming that the Australian dollar will remain around US77¢, and that interest rates will move broadly in line with market expectations. World oil prices are assumed to remain around US$64 a barrel. And the iron ore price is assumed to remain at US$48 a tonne.

All of these things will change, of course, and have been constantly over the last 12 months. Treasury has used lots of space in the budget papers to warn about them, providing detailed explanations of the reasons why they could change.

It has also explained why its forecasts could be better than expected, with a faster pick-up in Australia’s economic growth in 2015/16 potentially being driven by a stronger than forecast household consumption in response to rising housing and stock market wealth.

But those are the numbers the government’s working with. The politics of the next financial year, until the budget is updated in December, will be based on them.

[“source-smh.com.au”]