The federal government's budget deficit will hit a staggering $40.4 billion this year, Treasurer Joe Hockey says, with the budget to return to surplus one year later than expected in 2019/20.
The deficit has blown out by $10 billion more than expected six months ago.
Mr Hockey announced on Monday that the federal government has been forced to make dramatic adjustments to its first budget after huge falls in commodity prices have led to the biggest drop in the terms of trade since records began in 1959.
"This has been faster and deeper than anyone expected," Mr Hockey said in Canberra.
Falling commodity prices and lower wages growth in the last six months have cost the federal budget $31.6 billion in tax receipts. Government payments have also risen, and Senate obstruction has cost the budget another $10.6 billion over the next four years.
Overall, Mr Hockey said the government's six-month budget update predicts a $43.7 billion deterioration in the budget's position over the next four years.
These figures come with worrying signs for the economy.
Treasury now expects the unemployment rate to rise to 6.5 per cent in 2014/15 and 2015/16, which is up by 0.25 percentage points from their last prediction six months ago.
Economic growth is now expected to stay at 2.5 per cent in 2014/15 but then increase to near trend in 2015/16.
The huge fall in global commodity prices - including a 30 per cent drop in iron ore prices since May - has led to company tax receipts being revised downwards by $2.3 billion in 2014/15 and another $14.4 billion over the forward estimates.
Weaker wage and employment growth will hit income tax receipts by $2.3 billion in 2014/15 and $8.6 billion over the next four years.
Mr Hockey said "we need to lift economic growth to 3 per cent and beyond to get more jobs" and to decrease unemployment.
"There is still much work to be done but we are on the right track," he said.
The cost of compromising and negotiating with the Senate has cost the budget $7.2 billion over four years, with the largest impact coming from changes negotiated during the repeal of the Minerals Resource Rent Tax, which cost $6.6 billion.
The Abbott government estimates it has implemented around 75 per cent of the more than 400 budget measures, but the delays in implementing major savings have already cost the budget $3.4 billion.
A total of $33.9 billion in budget improvement measures are still yet to pass into law, including $5 billion of measures outlined by Labor while they were in government.
The government says it has improved the budget position by $3.2 billion over four years as a result of policy decisions taken in MYEFO, including slashing 175 government agencies and making billion dollar cuts to foreign aid.
Labor blames falling confidence
But Labor treasury spokesman Chris Bowen said the MYEFO showed the Coalition's promise to return to surplus had been "put off to the never never" while he predicted the government's promise to spur the creation of a million jobs was "simply not going to be met".
"This is not just about the price of iron ore, I wont play the game of blaming the Treasurer for reductions in iron ore prices, what I will hold the government and Treasurer to account for is the smashing of consumer confidence, which is now 18 per cent lower than it was before the election," he said.
"The fact is that employment growth has slowed dramatically after his budget, consumer confidence, business confidence and employment growth have been adversely affected.
Mr Bowen said Labor had already helped pass more than $20 billion in savings and would be as constructive as it could be, "if we are satisfied they represent good policy … but we are not going to walk away from our values.
"We will provide our comprehensive economic and fiscal plan over the course of the next 12 months," he said.
He said Labor would not proceed with the Coalition's paid parental leave scheme, and would cancel the Direct Action policy and be "fair dinkum" about multinational tax evasion.
National security measures have cost the budget $1.3 billion so far, including $630 million to tackle terrorism and $306 million for the most recent military deployment in Iraq.
This all comes after mounting speculation that the Reserve Bank may have to cut the official cash rate to a record-low 2 per cent some time next year.
Child care costs
Treasurer Hockey said child-care payments had increased in the last six months because more parents had been participating in the workforce.
He also said income support payments had increased by more than expected because more families were remaining in lower income thresholds and therefore claiming more benefits.
To confront these issues, Mr Hockey said the government will announce a "comprehensive families package" in the new year that would include child-care and parenting leave initiatives.
"This package will deliver greater workforce participation, opportunities for parents," he said.
He also urged the Senate to pass the measures that represent outstanding structural savings.
"These initiatives in health, education and welfare are essential for the medium and long-term benefit of the Australian people," Mr Hockey said.
But the Treasurer said the government had decided to deal with the huge fall in the terms of trade and the subsequent deficit blow-out by behaving differently from previous governments.
"Previously governments have chosen in these sorts of circumstances to spend more money - we haven't," he said.
"What we've chosen to do is to allow the revenue to take the hit but continue with our path of fixing up spending, having structural saves that over the medium term deliver a sustainable and believable surplus.
"This is a stark reminder … you need to have a strong budget to be able to take the hits of unexpected external events on the economy."
