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CHALLENGES FACING SCOTT MORRISON’S BUDGET

1) DEFICITS: Economists expect the Turnbull government will be able to boast a further improvement in the budget position and keep to the promise of a surplus in 2020/21. However, it is yet to explain how it will pay for flagged personal income tax cuts – which are tipped to be formally announced before the next election – while still aiming to get back in the black.

2) ECONOMY: The economy appears back on track after being dogged by adverse events in late 2015 and early 2016. The annual growth rate has accelerated to 2.8 per cent, a 15-month high. However, such growth is tainted by slow household spending in the face of weak wage growth, rising energy prices and high debt.

3) LABOUR MARKET: Jobs growth has been the good news story for the economy in the past year and has boosted government revenue. Employment has increased for 14 months in a row, which hasn’t occurred in more than 20 years. The jobless rate has dropped to 5.4 per cent, the lowest level in almost five years. But such strength has yet to translate into a pick-up in wage growth, which is restraining household spending.

4) WAGES GROWTH: The missing link in an improving economic outlook. Annual wages growth remains around its lowest in at least 20 years at 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 3.75 per cent in 2020/21, a level economists regard as optimistic.

5) 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 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.

6) INTEREST RATES: There has been a lot of discussion in recent months over whether the Reserve Bank will finally lift the official cash rate in 2018 having been stuck at a record low 1.5 per cent since August 2016. Other central banks, led by the US Federal Reserve, have started increasing their rates on signs that the fallout from the 2008-2009 global financial crisis has finally run its course. The last time the cash rate increased was in November 2010, although retail banks have independently raised their lending rates. However, it is unlikely the banks would move again in the short term as they head into a royal commission.

7) GLOBAL ECONOMY: The world economy is showing its first sustained improvement since the GFC, fuelling interest rate rises among global central banks. Geopolitical tensions are a key risk to the outlook, notably North Korea in Australia’s part of the world. China remains a key driver for the Australian economy and for now is following the stronger global trend.

8) COMMODITY PRICES: Iron ore prices have held up reasonably well since the budget, fuelling the government’s tax revenue. It recently touched $US72 per tonne compared with $US66 at the time of the budget, and after recovering from an earlier dip below $US60. Supply issues in China are expected to keep prices elevated in the short term.

9) CREDIT RATINGS: Concerns about Australia 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 update with a keen eye.