Much lower than expected wage growth has knocked a hole in the government's budget projections, blowing out deficits right through until 2019-20.
The worse position, confirmed by Treasurer Scott Morrison, comes despite a doubling in the price of coal and a 50 per cent jump in the price of iron ore.
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Mr Morrison said the government would adopt a "cautious" approach to commodity price assumptions in the update, allowing projections of weaker personal and company taxes from weaker wage growth to overwhelm projections of improved company tax revenue from better resource prices.
The contract price of coking coal has jumped from $US81 a tonne in March to $US200 a tonne, and the spot price to $US300 a tonne.
Wages are growing at just 1.9 per cent per year – the lowest rate on record – compared to a budget forecast of 2.5 per cent per year.
Deloitte Access Economics says in its Budget Monitor released on Monday that because many coal companies have been making losses, the jump in prices will have a slower-than-usual impact on tax collections.
Also, many of the factors that sent the coal price "stratospheric" were temporary, and that most other commodity prices would move more in line with budget assumptions.
![Treasurer Scott Morrison has confirmed the government's budget projections have worsened.](/web/20161122070442im_/http://www.theage.com.au/content/dam/images/g/s/9/8/z/3/image.related.articleLeadwide.620x349.gstd7i.png/1479704993971.jpg)
Mr Morrison said the government "agrees with Deloitte that commodity price impacts are being offset by wages and inflation outcomes".
Deloitte is expecting an underlying cash deficit of $40.5 billion in 2016-17, around $3.4 billion worse than budgeted.
![The budget deficit will be in a worse position, despite a rise in coal and iron ore prices.](/web/20161122070442im_/http://www.theage.com.au/content/dam/images/g/s/k/z/g/1/image.related.articleLeadwide.620x349.gstd7i.png/1479704993971.jpg)
The shortfall worsens over time.
Assuming no further policy changes, it forecasts a cash underlying deficit $3.8 billion worse than budgeted in 2017-18, and deficits $7.1 billion worse and a "sobering" $10 billion worse in 2018-19 and 2019-20. Across the four years, the deficits are $24 billion worse.
Deloitte Access is known as the 'treasury in exile' because of its employment for former treasury budget forecasters whose record is about as good as the treasury's.
"Two-thirds of national income and one-third of the budget comes from wages," Deloitte director Chris Richardson told Fairfax Media. "Wage growth is at a record low and jobs growth is not crash hot.
"I can't see the government doing much straight away to prevent the deficits growing. Most of the things that would help, help longer term; things like indexing payments more slowly that were offered up in the Coalition's first 2014 budget and rejected or amended by the Senate."
Mr Richardson agreed with staff from the International Monetary Fund who said last week there were risks in cutting government spending too quickly. The government plans to take $20 billion out of the economy in 2017-18, about 0.75 per cent of GDP.
"Australia might well lose its AAA credit rating in the months ahead," Mr Richardson said. "But at the moment that shouldn't push up the cost of borrowing much. What matters much more is a medium to long-term plan to get the deficit down."
Labor finance spokesman Jim Chalmers said if Australia did lose its AAA rating it would "push up mortgage repayments and smash confidence".
The Coalition would have no one to blame itself. It should immediately abandon its $50 billion tax cut for big business.
Mr Morrison said any claims made by Labor about the AAA credit rating should recognise that Labor's approach at the last election would have worsened the budget deficit in the near term and boosted it with higher taxes on capital gains which would slow economic growth.
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