Australia's Treasury has cut its estimate of the economy's potential growth rate to reflect a slower expansion in population and hours worked, a shift that implies problems for the government's fiscal health. In particular, it could make it even harder for the Liberal National Coalition of Prime Minister Malcolm Turnbull to get the budget back into surplus, a goal that has already been pushed back several times.
"We now think potential GDP will grow by around 2.75 percent over the next few years, lower than the 3 percent estimated at Budget," Nigel Ray, deputy secretary of Treasury's macroeconomics group, told a business conference in Sydney. "It is reasonable to conclude that the changes to population and hours worked that I have outlined would, everything else equal, lower the path of the projected underlying cash balance," he added.
In its May budget, Treasury had already projected a larger-than-expected cash deficit of A$35.1 billion for the financial year to June 2015, mostly due to the impact of falling prices for Australia's key commodity exports. The deficit was then forecast to shrink slowly to A$6.9 billion by 2018/19. Treasurer Scott Morrison is due to release updated forecasts for growth and the deficit next month as part of a regular mid-year review.
Australia is far from alone in having to revise down estimates of its potential growth rates, in large part to reflect slower population growth and the ageing of that population. "Fewer people means a smaller supply of employees," noted Ray. Australia's population grew by 1.5 percent in the year to June, well above much of the rich world but still down on the budget forecast of 1.75 percent. That in turn suggests Treasury may have to trim its economic growth forecasts from the current 2.75 percent for 2015/16 and 3.25 percent for 2016/17.
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