Australia's government estimated the budget deficit to be bigger than its previous projection over the next four years, but expects to see a surplus in 2020-21. Rating agencies said there was no immediate impact on the country's coveted 'AAA' rating as the budget update was in line with their expectations.
The budget deficit was expected to be around A$10 billion higher than forecast in May's Budget, Treasurer Scott Morrison said in the Mid-Year Economic and Fiscal Outlook, released Monday.
Accordingly, the deficit in 2019-20 was set to be A$10 billion compared to the forecast of A$6 billion in May.
Nonetheless, the budget was projected to return to surplus in 2020-21, the same year seen in the 2016 Pre-election Economic and Fiscal Outlook, or PEFO.
The government forecast underlying cash deficit to narrow to A$10 billion in 2019-20 from A$36.5 billion in 2016-17.
The government projected net debt to peak at 19 percent of GDP in 2018-19 before declining over the medium term.
Capital Economics economist Paul Dales said the country's 'AAA' rating will be lost sooner rather than later as the fiscal outlook remains fragile, but that this won't harm the economy much.
The Australian economy continues to transition from the investment phase to the production phase of the mining boom, the Treasury said.
Real gross domestic product was forecast to grow by 2 percent in 2016-17, partly reflecting the decline in GDP in the September quarter. The outlook was trimmed from 2.5 percent.
Economic growth was expected to pick up to 2.75 percent in 2017-18 as the detraction from mining investment eases.
Pointing out that there are downside risks to forecasts, Bill Evans, an economist at the Westpac Institutional Bank, said real GDP growth of 2 percent for 2016/17 looks a stretch and the medium-term projections err on the optimistic side.
Inflation and wages growth are expected to be slower than forecast in the PEFO, constraining nominal growth.
Commodity prices remain a key uncertainty to the outlook for the terms of trade and nominal GDP, the treasury added.
Consumer prices are expected to grow by 1.75 percent through the year to the June quarter 2017, before picking up to 2 percent through the year to the June quarter 2018. This was lower than forecast in the 2016 PEFO.
To absorb the spare capacity in the economy, from 2018-19 real GDP was projected to grow faster than potential at 3 percent. By the end of 2022-23 spare capacity was absorbed and real GDP was projected to grow at its potential rate thereafter.
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