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The Abbott Government’s first budget statement has revealed an economy in dire trouble with historically deep deficits, more people out of work, slower wage growth and massive revenue write-downs.

Treasurer Joe Hockey has unveiled the Mid-Year Economic and Fiscal Outlook (MYEFO) in Canberra, warning that wasteful spending will have to be “eliminated” but that Australians will also wear some hip-pocket pain.

“Living within our means … will also require people to adjust to reductions in some spending to which they have become accustomed,” the statement says.

“Only in this way will the Government be able to sustainably fund the policies that are needed now and in the future.”

Detailed cuts are expected in the May budget but MYEFO has revealed that trade training centres, mostly based in high schools and brought in by Labor, have been scrapped to contribute $1 billion for the Gonski school funding agreements.

The Government decided not to scrap the agreements last month, after protests from states and territories.

The schools funding gap will also be covered by dumping the $528 billion Building Stronger Communities Fund – slated to pay for small infrastructure projects.

The figures show this year’s deficit will blow out to $47 billion, $17 billion higher than forecast in the last major budget update in August, the independent Pre-Election Economic and Financial Outlook (PEFO).

The combined deficits over the four years of the forward estimates total $123 billion, with the small surplus forecast in August for 2016-17 of $4.2 billion blowing out to an $18 billion deficit.

The figures have forced the Government to dump its election promise to deliver a surplus in the first year of a second term, saying only that it is committed to “returning the budget to sustainable surpluses that build to at least 1 per cent of GDP by 2023-24”.

It has blamed a “softer” economic outlook, high demand for government programs – particularly health care – and “essential steps” it has taken to address “inherited” issues.

GDP forecast to slow, with unemployment tipped to remain high

Growth in real GDP is forecast to slow to 2.5 per cent next financial year, a drop of 0.5 of 1 per cent from PEFO.

Unemployment is forecast to remain higher than in August’s figures, with a sustained rate of 6.25 per cent over the forward estimates, instead of dropping to five per cent in 2015-16 as predicted in PEFO.

That will carry with it an extra $3.7 billion in welfare payments.

Wages growth is also growing “well below previous expectations” at the lowest rate since the March quarter of 2000.

“While weighing on household income, this will assist in supporting employment,” the statement says.

But that has also hit consumer spending and investment in housing with both revised down since PEFO; household consumption falls to 2 per cent and investment in private dwellings from 5 per cent at PEFO to 3 per cent.

The Government says the “essential steps” it has taken that add to the deterioration in the budget position include the $8.8 billion grant to the Reserve Bank in October, and an extra $1.2 billion to pay for processing asylum seekers offshore.

Another $1.2 billion has been committed to schools funding, following the Government’s decision not to scrap the Gonski funding agreements.

A total of $2.9 billion in savings has also been lost by a move to dump several tax changes brought in by the previous Labor government.

MYEFO says the medium-term deficits projected are also due to “strong spending growth” driven by increasing demand for Government services, particularly healthcare.

The MYEFO statement is seen as being used by the Government to prepare the ground for major cuts in the May budget.

They will be guided by the Commission of Audit which will report early next year on potential savings through all areas of Government spending.

It will hand its first report to the Government at the end of January with its full findings due in March, ahead of the Coalition’s first budget in May.

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