Australia facing 'decades of budget deficit'

Federal Treasurer Wayne Swan has said the budget revenue has taken a $7.5 billion "sledgehammer" hit because of twin factors - a high dollar and lower terms of trade.

Swan’s statement comes even as a think-tank warns that Australia is facing a decade of budget deficits, , with the annual total set to pass $60 billion in 2023.

A report released today by the Grattan Institute predicts federal and state budgets will generate yearly combined deficits of at least $80 billion within a decade unless drastic cuts in welfare, health and education are made.

Related: 'Kill the poor to balance the budget'

Grattan Institute chief executive John Daley is quoted as saying that it is a concern that neither major party was willing to make efforts to return to surplus.

“This is probably as good as it gets in terms of economic circumstances over the next two years. Our view is we will need to make some tough decisions in order to bring the economy back into surplus,” he said. “If we are not planning on running a budget surplus in the next four years it is difficult to see how we will run surpluses over the cycle.”

The Grattan Institute says that while notionally on track to surplus at the moment, the combined total of state and Commonwealth budget deficits could reach 4 per cent of gross domestic product by 2023, which is about $60 billion in today's dollars and would be about $100 billion in 10 years' time.

"This budget is the most challenging in a decade'

Mr Swan said over the past six months the federal government has been contending with a "unique economic event" - lower terms of trade but a dollar that won't budge.

"That's caused a hit, like a sledgehammer to revenues in the budget, since the mid-year update of something like $7.5 billion," Mr Swan told ABC TV on Sunday, adding that the impact will extend across the forward estimates.

Mr Swan said his sixth budget would be delivered in "the most challenging circumstances we have seen in decades."

"The sustained high dollar, global headwinds and subdued price pressures across the board have contributed to weaker than expected nominal GDP growth and substantial revenue write-downs," he said later in his economic note.

Related: Plunging carbon price will hit the budget

Mr Swan reiterated his focus on protecting jobs and supporting growth in the upcoming budget.
He said it would be a "tragic mistake" to wield savage cuts to return to surplus earlier, which was the approach endorsed by the opposition.

Mr Swan is in Washington this week for the spring round of top level Group of G20 industrialised nations and International Monetary Fund meetings.

He said the global growth outlook was looking "fragile".

"Conditions in some of the major advanced economies are very challenging," Mr Swan said, slamming the application of "mindless austerity" in Europe.

"You can't cut your way to growth," he said.

Opposition Leader Tony Abbott defended backing away from an earlier commitment to deliver a budget surplus in the first term of a coalition government.

"There's a sense in which all bets are off until we have seen what their fiscal outlook is," he told Sky News.

He said the budget needed to be brought back to surplus as soon as possible.

The government was trying to buy votes before the election by making lots of promises, and the coalition wouldn't engage in an auction, Mr Abbott said.

"There are lots of promises that the current government will make going into the election that the coalition simply won't match," he said.

Meanwhile, the coalition has warned the budget could be facing a multi-billion-dollar black hole after Europe's carbon price plummeted.

But Mr Swan says it's a "folly" to take a spot price for the European carbon price on one day to draw conclusions about the implications for the Australian carbon price in years to come.

Treasury is forecasting a carbon price of $29 a tonne in 2015 when a local emissions trading scheme is linked to the European ETS.

This week the EU price dived to less than $4 a tonne but Mr Swan insists it can bounce back and he defended Treasury forecasts.

The big difference between the Australian forecast and the latest European carbon price could cost the federal budget up to $7 billion, some experts predict.

He said the carbon price in Europe had been higher in the past and economic conditions could improve.

"In the future we could see higher prices," Mr Swan said.

Mr Swan guaranteed the household carbon tax assistance would stay, even with a potentially lower carbon price in coming years.

(With inputs from ABC)