Dramatic reduction in federal budget deficit sets up pre-election war chest

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Dramatic reduction in federal budget deficit sets up pre-election war chest

By Shane Wright

Treasurer Josh Frydenberg will deliver the best budget numbers in a decade on the back of soaring company tax, giving the Morrison government a multi-billion dollar war chest for the looming federal election.

The mid-year budget update to be released Monday will more than halve the expected deficit for the current financial year to less than $7 billion.

Without additional spending, the surplus for 2019-20 could be north of $10 billion, becoming the first budget to be in the black since 2007-08. In May the budget had been forecast to show a $2.2 billion surplus.

Treasurer Josh Frydenberg set to announce much improved budget bottom line

Treasurer Josh Frydenberg set to announce much improved budget bottom lineCredit: Alex Ellinghausen

Since 2007-08, governments of both political persuasions have run deficits amounting to $360.5 billion which has taken total outstanding debt to a record high $537 billion.

A surge in tax revenue, largely from the company sector, on top of an improvement in the prices for key Australian exports has delivered a windfall gain to Mr Frydenberg, who said the government's policy settings were working.

"The government's plan for a stronger economy is working, but there is no room for complacency," the Treasurer said.

"The job of cleaning up Labor's budget mess is not done and we must stick to the plan."

Strong employment growth has also lifted personal income tax collections which so far this year are $2.4 billion ahead of expectations.

The update will include some of the government's recent spending announcements in the budget forward estimates, including an extra $1.1 billion for schools, $600 million in GST top-ups to West Australia and the Northern Territory, $300 million in drought assistance and the bring forward of small business company tax cuts.

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It will also confirm the government's own cap on tax at 23.9 per cent of GDP will be hit earlier than expected, effectively forcing it to promise tax cuts in the run-up to next year's election.

The extra revenue - which will also boost the forecast surpluses for the 2020-21 and 2021-22 financial years - gives Mr Morrison and Mr Frydenberg scope to offer substantial tax cuts starting as early as next financial year.

Much will depend on key economic forecasts with the government expected to maintain GDP will grow by 3 per cent this financial year and next. The OECD recently noted it expects the Australian economy to slow over the next two years, partly due to the ongoing trade war between the United States and China.

The forecast unemployment rate is likely to be reduced close to 5 per cent but expected wages growth, especially for 2019-20, is tipped to be downgraded from May's projection of 3.25 per cent.

Wages growth likely to be downgraded in Monday's budget update

Wages growth likely to be downgraded in Monday's budget updateCredit: Gabriele Charotte

Some private sector economists believe wages growth could be as low as 2.2 per cent next financial year.

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The terms of trade, stronger than expected this financial year, may have to be downgraded. Oil prices alone have fallen sharply over the past month, with Petroleum Resource Rent Tax one of the few revenue streams performing below forecasts.

There are growing concerns about the faltering housing market and what that may mean for the domestic side of the economy.

So far this month house values in Sydney and Melbourne dropped by another 0.9 per cent while they have also fallen in both Brisbane and Perth. Weekend auction rates continued to slide below 40 per cent in Sydney and Melbourne with little sign of any improvement on the horizon.

Retail sales have been lacklustre, with the recent national accounts suggesting Australian shoppers are digging into their savings to keep spending up on essential goods.

ANZ senior economist Cherelle Murphy said the larger-than-expected surplus for 2019-20 was likely to be eaten away by election giveaways that may be useful to offset the financial pressures facing Australian households.

"Fiscal stimulus delivered to the household sector would be a genuine motivation for a government looking to at least partially offset the downward pressures on the economy from falling house prices and soft wages," she said.

Labor's finance spokesman Jim Chalmers signalled the opposition would focus on the lift in tax revenues that have helped improve the budget bottom line.

"They will collect this year something like $100 billion more in taxes than they did in 2013. And yet we have still got net debt twice what they inherited, we've still got gross debt almost twice what they inherited and over half-a-trillion dollars for the first time in Australia's history," he said.

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