Influences on the Australian Budget

The role of economic forecasts are crucial in setting a government Budget. As the Treasurer Scott Morrison approaches his first Budget he must consider what is likely to happen in the economy.

This is important because government revenue and spending are affected by the level of economic activity. When growth is slowing, or worse GDP declines, government revenues are lower than expected and government expenditure is higher. This has been the story in Australia since 2011.

The present government, and to an extent the last one, have an irrational (from an economists perspective) desire to achieve a Budget surplus. It would appear that they wish to cut spending to achieve this. However that is the exact opposite of what a government should do when growth is slowing and there is the threat of a recession.

The Committee for Economic Development of Australia (CEDA) have issued a report on the trends in the Australian economy. It makes gloomy reading for Morrison. There will be no strong growth in tax receipts and it would appear there is a good deal more structural unemployment to come.

Worst of all for the Treasurer there is a great deal of uncertainty over currency and commodity markets. Australia depends on commodity exports and the exchange rate will determine the value of those exports. It is likely that once again the Budget figures released in May will be substantially revised during the year.

The Age covers the CEDA report here

This article is especially important to VCE Economics students who must have a firm understanding of events and influences on the Australian economy over the last four years. For both IB and VCE students the importance of forecasting to Budgetary/Fiscal policy is relevant as in the influence of the budget on the real economy.