Wayne Swan has unveiled a significant improvement in the Government’s fiscal position from next year, with this morning’s Mid-Year Economic Forecasts showing far higher economic growth and lower unemployment than the Budget forecast back in May.

The Budget forecasts, made in the midst of what looked to be a prolonged local impact of a global recession, showed virtually flat economic growth and unemployment continuing to rise into 2011 to 8.5. But Australia has experienced only one quarter of negative GDP and unemployment has remained below 6% so far. MYEFO predicts unemployment will peak this financial year instead of next year, at 6.75%, before falling back to its current level by 2012-13. Economic growth will be 1.5% this year (a 2% increase on the May forecast), 2.75% next year and then there will be a more moderate recovery in the following years of 4% rather than 4.5%.

Treasury also anticipates inflation remain moderate, bottoming out next year at 1.5% before rising again.

However, the stronger growth won’t start to flow through to the Budget until next year, with the same deficit this year ($57.7b), albeit a smaller proportion of GDP given stronger economic growth. The big impact will be from 2010-11, when the deficit falls much more rapidly — about 1% of GDP a year — reaching $15.9b in 2012-13. Net debt will now peak at 10% of GDP in 2013-14, at around $153.2b, or about $50b less than predicted in May. The Government still anticipates not returning the Budget to surplus until 2015-16, but there remains a strong sense that this target will be reached earlier given strong China-driven growth.

Treasury expects the international economy to recover more quickly than previously forecast, with China returning to 9+% growth, and Europe, Japan and the US all staggering out of recession to record anaemic GDP growth — but still stronger than thought back in May.

Despite a slightly-less-worse terms of trade forecast for this year, Treasury has further downgraded its forecast for Australia’s current account deficit this year, but with an improvement next year as our terms of trade swing back into positive.

Treasury puts the stronger Australian position down to the Government and RBA stimuli, a stronger-than-expected world recovery, especially in China, and the strength of the Australian financial sector. In particular, Treasury believes the fiscal and monetary stimuli have been more effective than expected because of a sort of confidence multiplier, with both consumer and business confidence recovering much more strongly in Australian than levels in OCED countries from late last year. As a result, consumers and businesses have been more willing to spend. However, Treasury still wants to see the stimulus continue. The economy is not yet able to grow at rates sufficient to prevent a rise in unemployment.