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What’s the economic outlook?

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What a difference a year makes. Despite the intention to bring the Budget back into surplus this year, significant revenue write-downs have resulted in a $19 billion deficit for the Federal Budget.

Since the mid-year economic review in October, the total revenue write-down has been forecast at $60 billion over the next four years. If these estimates are correct, Australia’s net debt will peak at 11.4% of GDP in 2014-15 and fall to zero by 2022.

Treasury expects a lower economic growth next year of 2.75%, lifting to 3% in the following year.  But unemployment is expected to rise slightly, and sit at 5.75% for the next two years.

The focus of this Budget is clearly on maintaining economic growth and stimulating job creation. It includes a $1 billion investment in a program called ‘A Plan for Australian Jobs’ designed to boost Australian innovation, productivity and competitiveness.

An additional $15.7 million will be provided to continue to engage local employment coordinators in 20 vulnerable labour markets that will drive local solutions for unemployment.

There’s support for small-to-medium business enterprises (SMEs), with the Government allocating $378.6 million to stimulate private sector investment. Small business owners will also have the potential to access $7.2 million worth of funding over three years to improve the capacity of their companies to engage in the digital economy and take advantage of the National Broadband Network (NBN).

The plan to spend $24 billion towards road and rail projects in metropolitan and regional areas was more warmly received. These infrastructure investments have the potential to boost economic growth through improved capacity and productivity.

Both Moody’s and Standard and Poor’s have affirmed Australia’s triple-A credit rating after the release of the Budget. Financial markets barely reacted, and the dollar remained steady.

So overall, it seems the Budget has gone some way to address concerns about Australia’s slowing economy, and many of these changes should have a positive long-term impact on economic growth. The question many people are asking, however, is the future of these proposals given the upcoming September election.

When viewed in the context of the Reserve Bank of Australia’s cut to official interest rates, and the possibility of further decreases, it’s evident that unemployment and growth are the key economic issues, rather than inflation. If the Australian economy continues to slow, there will be further revenue write-downs and an increase in the Budget deficit – something both sides of politics are keen to avoid.

Investment portfolios should be poised to take advantage of the opportunity for future growth, but be resilient enough to withstand any short-term downturn.

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