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Budget update: what does it all mean?

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The mid-year budget update, like the federal budget itself, is an economic and a political document. There are fundamental economic assumptions. And while you can take an optimistic or pessimistic view, the assumptions are unlikely to be significantly different from the consensus.

But from a political standpoint, budgets can vary markedly depending on the policy priorities adopted by the government. Still, at the end of the day, the community expects that governments live within their means, so there must be a strategy to keep deficits and debts at sustainable levels.

The blowout in the budget deficit was largely due to the slump in commodity prices, in particular iron ore. The deficit has been revised up by $2.3 billion this year. In addition, the weaker-than-expected economic growth outcomes - not just in 2015-16 but over the forward estimates - contributed substantially to the lift in the deficit.

Federal budget

The key points from the update are:

Bigger deficit

The federal government is projecting a $37.4 billion deficit (2.3% of GDP) for the current financial year. The May budget had tipped a deficit of $35.1 billion. A budget surplus is not expected over the forecast period.

Economic assumptions

There has been a slight softening of economic growth assumptions for 2015-16. Growth is expected to ease to 2.5% in 2015-16, rather than the previously reported 2.75%. However, unemployment forecasts have improved from 6.50% to 6.0%. Wages growth is expected to hold at 2.5% in 2015-16.

Outlook

The budget deficit is expected to narrow from 2.2% of GDP to 0.7% in the space of four years. The underlying cash balance is projected to return to surplus in 2020-21, one year later than projected in the 2015-16 budget.

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