Treasurer Scott Morrison's budget is facing significant deterioration, with a private forecast tipping bigger-than-expected deficits over the next four years.
The closely-watched budget monitor from Deloitte Access Economics predicted this year's deficit would blow out by $3.4 billion to $40.5 billion, and $24 billion over the forward estimates.
The monitor warned a recent surge in iron ore and coal prices was a "blip" and would not be enough to make a dent in the deficit, while slow wages growth fuelled by low inflation would hurt any recovery in tax revenue.
Deloitte partner and former Treasury official Chris Richardson said evidence of the slowest wages growth on record, revealed in the most recent Wage Price Index, meant the Government would have difficulty in meeting its budget forecasts.
"The biggest chunk of the economy and the biggest chunk of the budget is the wages we earn and the taxes we pay on them," Mr Richardson told the ABC's AM program.
"With wages growth dropping to a new record low, that suggests that we won't meet the budget forecasts."
The Federal Government will update the budget on December 19 when the Mid-year Economic and Fiscal Outlook (MYEFO) is released.
While not foreshadowing a deterioration in the budget forecasts, Mr Morrison told AM the Government was not counting on a recent jump in commodity prices to be sustained.
"What he [Richardson] said about the revenue side of the equation is telling, and I think it puts to rest some of the more enthusiastic commentary, which says that the budget will all be fixed by the movement in the iron ore price. I don't think that's true at all," Mr Morrison observed.
"These prices will move around and what we've done is take the sober and cautious approach.
"A year ago in the first MYEFO, I took a caution approach there on the outwards years and revised down the projections for growth and we continue to take a conservative and sober view."
Mr Morrison continued that cautious approach when asked about the planned return to a balanced budget in 2021 that was outlined in the most recent forward estimates.
"I know others in the past have made bold predictions and promises about this," he said.
"The 2021 budget was a prediction based on the numbers. The numbers move. They always have."
MYEFO not expected to see significant change to forecasts
Mr Richardson said he did not expect to see a significant write-down in MYEFO, despite what he called a "massive" $24 billion blowout over four years.
He believes Treasury will stick to its guns on a "she'll be right" assumption built into long-term modelling.
Mr Richardson said Australia's AAA credit rating was not in immediate jeopardy from the budget blowout, but warned ratings agencies were continuing to watch for evidence of budget repair.
"My guess is that we do have further time with those ratings agencies but as they've already said — we don't have forever. It's six months, it's 12 months until they see more runs on the board," he said.
But he also pointed to a dictum laid down by country singer Kenny Rogers that Treasury might eventually need to consider.
"You've got to know when when to hold, and know when to fold 'em," he added.
Company tax cut should remain on the agenda: Richardson
Despite the prospect of a blowout which leaves the budget "like a shag on a rock", Mr Richardson said the downturn in Government finances was not so severe that it should jeopardise promises, such as the planned company tax cuts.
"You don't need to repair the budget overnight, but it also shouldn't mean abandoning economic reforms," he argued.
"Yes, company tax cuts cost a chunk of money, but they are one the few things that increase the size of the economy at the same time."
Mr Morrison leapt on those observations, pointing out that international moves towards lower company taxes, such as a recent cut in the UK and US President-elect Donald Trump's policy, would leave Australia uncompetitive if it did not also lower the impost on bigger businesses.
"There will be a drain of capital going to the lower tax jurisdictions and where does that leave revenue then?" he asked rhetorically.
"So you have to remain competitive and continue to allow your companies to be able to have the earnings, and that means that they can pay their staff more, that they can give them more hours and that they can take home more. That's how you lift revenue.
"You don't squeeze the tax on the lemon harder. They'll be getting arthritis if they're squeezing the lemon so hard, the Labor Party. They'll do themselves an injury.
Wind back 'unfair age-based tax breaks' to help fix budget
A separate report from the Grattan Institute has suggested one area where the Federal Government could save a billion dollars a year, by winding back three tax breaks for older Australians that have "no sensible policy rationale".
Grattan said seniors pay less tax and get a higher rebate on private health insurance than do younger workers on the same income due to the Seniors and Pensioners Tax Offset (SAPTO), a higher Medicare levy income threshold and higher private health insurance rebate.
"Large tax breaks for seniors are a relatively new invention not provided to previous generations, and the current generation of seniors receive much more than their predecessors from government spending, particularly on their health," observed Grattan chief executive John Daley.
Grattan recommends that only pensioners should receive SAPTO and the Medicare levy threshold should be lowered in line with younger taxpayers, saving $700 million per annum.
Reducing the private health insurance rebate in line with that received by younger Australians would save a further $250 million.
Follow Peter Ryan on Twitter @peter_f_ryan and on his Main Street blog.
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