The federal budget deficit will blow out to A$40.4 billion in 2014-15, up from the $29.8 billion forecast in May’s budget, according to the Mid-Year Economic and Fiscal Outlook (MYEFO) released today.

The government has pointed to falling commodity prices for a A$14.4 billion loss in revenue over the forward estimates, and blamed senate blockages for A$7.2 billion in foregone savings over the same period.

“We are now witnessing the largest fall in the terms of trade since records began in 1959,” Treasurer Joe Hockey said in a statement.

“This has been faster and deeper than anyone expected. Our nation’s export income has not been what we expected. For example iron ore, which is one fifth of our nation’s export dollars, has fallen from $120 a tonne at the beginning of this year to around $60 a tonne today.”

The missed forecasts have led the government to revise its plan to bring the budget back into surplus out to 2019.

Real GDP is forecast to grow at 2.5% in 2014‑15, before increasing to near‑trend growth of 3% in 2015‑16. Hockey today said Australia needed to lift economic growth to 3% and beyond to create more jobs and reduce unemployment.

Weaker wage and employment growth are expected to lower the government’s income tax receipts from individuals by $2.3 billion in 2014‑15 and $8.6 billion over the forward estimates, with unemployment forecast to grow to 6.5% in 2014-15, falling back to 5.75% in 2017-18.

An additional A$3.7 billion has been cut from foreign aid, which Hockey said was “by far the largest reduction” in the updated spending plan.

Our panel of experts respond below.

Richard Holden, Professor of Economics at UNSW Australia Business School

The key message from today’s MYEFO is not that the budget outlook is materially worse than predicted. And it’s not just that iron ore and wheat prices have fallen a lot in recent times.

In the wake of this, tax receipts are forecast to fall by $6.2 billion this year and $32 billion over the next four years. This is because a shockingly large proportion of Australian government tax revenues come from company and personal income tax. This is out of whack with other OECD nations, distorting and inefficient, and exposes us to the whim of commodity prices.

The main takeaway is that to avoid volatility and inefficiency of tax receipts we need to shift our tax mix from income taxes to consumption taxes, with appropriate compensation for less well off individuals.

Jakob Madsen, Xiaokai Yang Professor of Business and Economics at Monash University

The budget has been in structural deficit since the Howard government, supported by Labor, which reduced the effective tax rate by 3 percentage points in the wake of the windfall gain from the boom in commodity prices, asset prices and income in most of the first decade of this century.

The surplus enjoyed for many years was, to a large extent, temporary and we are now stuck with a structural deficit that neither Labor nor the Coalition have done much to close – in fact, the current government’s abolishing of the carbon and mining taxes have worsened the structural deficit and, from an economist’s perspective makes little sense.

The hope that economic growth will close the deficit in due course is wishful thinking as the economy is not showing any sign of recovery within the foreseeable future. Furthermore, the falling commodity prices have been converging towards the long-run equilibrium; not bad luck.

The government needs to make a much more credible commitment to reduce the structural budget deficit than it has done to date. If the intention is to do that through savings, then they need to go for savings on large expense items like the family tax benefits and old age pensions.

Margaret Mckenzie, Lecturer, School of Accounting, Economics and Finance at Deakin University

The budget deficit “blowout” is worth less than 1% of GDP. In principle it could be due to chance, but the government placed so much emphasis on the budget that it has been obliged to highlight it. The MYEFO points to slower than expected growth in nominal GDP (current dollars) of 1.5% compared with on track and “solid” growth in real GDP (adjusted for price changes) of 2.5%. The slower growth in nominal GDP is attributed to a higher than expected fall in the terms of trade, including “significant falls in prices of iron ore and coal, and weaker wage growth”. This implies a lower rate of inflation. Normally a government would find this attractive in the context of Australia’s good real GDP growth. But instead the statement has a flavour of desperation of about it. The subtext is that the government may be relying on bracket creep whereby inflation raises marginal tax rates.

What the MYEFO also reveals is the fragility of prediction. Commodity prices are always volatile. Australia’s dependency on commodities and the continuing absence of a strategy for reducing this is shown up. The corporate tax fall attributed to commodity price falls is estimated at $2.3 billion in 2014-15. This is not nearly so large as the tax foregone by repealing the carbon tax which earned $6.6 billion for 2012-13 alone. Ironically a fall in demand for coal is partly attributable to other countries including China seeking cleaner energy.

Again weaker wage growth could be met with approval by this government. But together with weaker employment growth, income tax receipts are lowered by $2.3 billion and “increase payments for existing government programmes”. The actual estimate for the increase in social security and welfare is not given in the overview, and is apparently buried in Table 3.22 as $4.3 billion. None of these items is large in the context of a total tax take estimate of around $386 billion and expenditure of $423 billion in 2014-15.

More to come…

Richard Holden is an ARC Future Fellow.

Ben Phillips, Jakob Madsen, and Margaret McKenzie do not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article. They also have no relevant affiliations.