Slow wages growth is one of the issues affecting the federal economy.CHALLENGES FACING SCOTT MORRISON’S BUDGET1) POLITICS/ELECTION: The Turnbull government will be pinning its hopes on the budget to change its fortunes in opinion polls having continually dragged its heels against Labor since the 2016 election. Malcolm Turnbull will be hoping it will also lift his standing to stave off any challenge to his prime ministership in the party room ahead of the next election.
2) DEFICITS: Economists expect the government will be able to boast a further improvement in the budget position and keep to the promise of a surplus in 2020/21. Tax revenue is rolling in, helped by a booming global economy but measures like personal tax cuts also have to be accounted for in leaner times.
3) ECONOMY: The economy has repeatedly failed to live up to its potential, recording its slowest quarterly rate of activity in over a year in the final months of 2017. Economic growth remains restrained by slow household spending in the face of weak wage growth, rising energy prices and high debt.
4) LABOUR MARKET: Jobs growth has been the good news story for the economy in the past year and has boosted government revenue. Employment increased by a record 16 months in a row, producing more than 420,000 positions, although growth has come off the boil in recent months. Such strength has drawn more job seekers into the market, which has slowed the rate of decline in the jobless rate. It has also yet to translate into a pick-up in wage growth.
5) WAGES GROWTH: The missing link in the economic outlook, annual wages growth remains around its lowest in at least 20 years at just over two per cent, which is affecting household spending. Strong wage growth is a key component in returning the budget to surplus with Treasury having forecast a rate of 3.5 per cent in 2020/21.
MORE BUDGET:The federal budget in simple language6) CONFIDENCE: There has been a big divide between the upbeat confidence and conditions of business and the mediocre sentiment among consumers. Businesses have started investing again and are hiring new staff in droves. But consumers have been hampered for most of the past year by rising energy prices and high household debt in a low-wage growth environment. History shows confidence readings usual converge over time as one feeds off the other, although it is unclear whether it is business or consumers that have got it right.
7) INTEREST RATES: The next move in interest rates is widely expected to be up but the timing of the Reserve Bank finally pulling the trigger remains up in the air – anywhere from late this year to way into 2019. The official cash rate has been at a record low 1.5 per cent since August 2016. The jobless rate and wages growth are key factors as to when rates will be hiked. Other central banks, led by the US Federal Reserve, have started increasing their rates on signs of an expanding global economy.
8) GLOBAL ECONOMY: The world economy is showing its first sustained improvement since the 2008-2009 global financial crisis, fuelled by savage company tax cuts in the US and other countries. China remains a key driver for the n economy and for now is following the stronger global trend.
9) COMMODITY PRICES: Iron ore prices have held up reasonably well since the mid-year budget review in December, fuelling the government’s tax revenue. The price has averaged $US65 per tonne compared with Treasury’s most recent $US55 forecast for early 2018.
10) CREDIT RATINGS: Concerns about being able to retain its triple-A credit rating appear to have eased as the budget remains on a gradual path to a surplus. The 2016 election and a fractured parliament have not led to a major policy blockage as feared. Even so, global rating agencies will be watching the budget with a keen eye.