Coalition's fervour for a budget surplus cools as prospects turn to toast The impact of the coronavirus continues to be the focus of economists around the world. Here the growing concern is the tourism and retail sectors. The problem with determining how big a hit the virus will have is compounded by the growth of China’s importance since the last major health scare, the Sars virus in 2003. But while the impact on our economy remains unclear, it is obvious the budget surplus is almost certainly not going to be delivered this year. When politicians change their language they often give away more than they wish. In his budget speech last year the treasurer, Josh Frydenberg, opened with the line: “I announce that the budget is back in the black and Australia is back on track.” Related: Budget ‘surplus’ and coronavirus: Morrison is caught between a slogan and a hard place | Peter Lewis The media release accompanying the speech was headlined “Budget returns to surplus” and in his interview with Leigh Sales on ABC’s 7.30 after the speech he said: “It’s actually a $7.1bn surplus for 2019-20, with $45bn of surpluses over the next four years”. And: “We have delivered a $7.1bn surplus for 2019-20 which is what this budget is all about.” But a week ago in another interview with Leigh Sales, Frydenberg was suggesting “delivering a budget surplus is not our primary focus”. Funny that. It’s amazing how things stop becoming a priority when the likelihood of them occurring diminishes. Of course that “$7.1bn” surplus was revised down in the December midyear economic and fiscal outlook to $5bn, and the projected surplus for 2020-21 of $11bn was slashed to $6.1bn. And both these downgrades occurred before the bushfires really took hold in the south-east of Australia and before anyone had heard of coronavirus. We already know the budget surplus is in danger. The latest monthly financial statements released by the finance department show that the deficit for the year to the end of December was $15.2bn, some $1.2bn larger than the $14.05bn estimated in the Myefo. This time a year ago the budget balance was running $1.6bn better than expected in the 2018 Myefo; it ended up being $4.5bn better. So for the deficit at this stage to be worse than expected is not good – especially given the latest figures come from before the impact of the virus. The big reason the surplus is toast is the reliance the budget has on company tax. Already the level of company tax for the first six months of this financial year is $500m down on what was predicted. That is going to go down more, and the budget has less room to adjust than it did in the past. In 2003 when the Sars virus hit, company tax accounted for just on 16% of total revenue. Now it accounts for 19.6%: That difference is the equivalent of about $18bn extra in tax collected in current dollars. And the major reason for that increase is iron ore exports to China. Back in 2003 iron ore and coal accounted for only about 23% of all of Australia’s goods exports. Now it is just under half: And a massive share of those exports head to China – 38% of our merchandise exports go to China compared with just 8.4% back in 2003: And it is not just exporting goods that has become much more important. Australia’s education and tourism industries have also grown, and again they have grown on the back of China. In 2003 Chinese accounted for only 4% of short-term visitors; now it is the biggest source with 15% of the total. And the total number has risen from about 200,000 a year to 1.46 million now: And of course these are not just tourists. Over the period since 2003, foreign students have surged into our higher education sector, and China has led the way. In 2003, the 60,000 Chinese student enrolments accounted for 20% of all foreign students; last year the 260,500 Chinese students accounted for 27%: All up this adds to our exports being much more important to our economy than they were in 2003. Our exports now make up 23% of our total GDP, and last year essentially accounted for 45% of the growth in our economy. That is good when the domestic economy is struggling as it currently is – because our economy is largely protected from a recession because China wants our iron ore. But if that comes to a halt … The other concern is that it is not just Australia that relies more on China but the rest of the world as well. In 2003 China’s economy was growing much faster than it is now, but it was much smaller. It accounted for just 4.3% of the world’s economy. Now it makes up 16.3%, and is second only to the US: It means the global economy is in greater danger of slowing due to the virus than happened during the Sars outbreak. That doesn’t mean we are about to have a recession. We don’t need to talk ourselves into one – and if you hear of friends who are worried about going shopping or eating at restaurants because of the virus you can tell them they don’t need to worry. And that is one problem with economic shocks – rationale behaviour cannot always be counted on. But one thing we can all count on: as the likelihood of the budget surplus slips away, the government will continue to suggest that a surplus is not as important as it once vehemently believed it was. Greg Jericho writes on economics for Guardian Australia