NO.141

2006-07 MID-YEAR ECONOMIC AND FISCAL OUTLOOK

The 2006‑07 Mid-Year Economic and Fiscal Outlook (MYEFO) released today shows that the economic and fiscal outlook for Australia remains sound, although the economy is being affected by severe drought.

The Australian economy is expected to grow by 2½ per cent in 2006‑07, significantly slower than the Budget forecast of 3¼ per cent. The downturn in the farm sector and related industries since the Budget has reduced forecast growth by three quarters of a percentage point.

Employment growth has been stronger than anticipated at Budget, contributing to the unemployment rate falling to 30‑year lows. However, employment growth is expected to moderate in the period ahead, in line with around trend non‑farm output growth. Inflation has been higher than anticipated at Budget, mostly reflecting sharp increases in fuel and fruit prices, but is still forecast to average 3 per cent for the year and to settle in the middle of the target band by 2008. The risks to the economy are weighted to the downside, particularly if dry conditions persist.

The fiscal outlook continues to remain sound. The Government expects an underlying cash surplus of $11.8 billion for 2006‑07, marginally stronger than the 2006‑07 Budget forecast. Surpluses are also forecast over the forward years.

Estimated taxation receipts in 2006‑07 are broadly unchanged from the 2006‑07 Budget. A lower than expected receipts outcome in 2005‑06, lower realised capital gains from investors and the effects of lower oil prices and higher deductible costs on petroleum resource rent tax have, together, broadly offset the effects of stronger employment growth and higher expected company profits.

Cash payments in 2006‑07 are estimated to fall, largely reflecting slippage in some defence acquisition projects and lower payments across a range of income support programmes, including Newstart Allowance, Disability Support and the Age Pension. These reductions are partially offset by policy measures announced since the Budget, including drought relief to support affected regions, new and expanded drug listings on the Pharmaceutical Benefits Scheme and payments to healthcare providers to ensure veterans continue to access free health care.

The projected underlying cash surpluses for the future years emphasise Australia’s sound fiscal outlook at a time when many of the major advanced economies are continuing to experience significant deficits.

Commonwealth net debt was eliminated earlier this year, falling from a peak of 18.5 per cent of GDP in 1995‑96. Net worth is projected to be positive for the first time in 2008‑09.

20 December 2006

CANBERRA

Contact: David Alexander

02 6277 7340