Federal Budget hole to hit $442b, but report suggests increasing spending on welfare, GST relief and income tax cuts
The coronavirus crisis will punch a $442 billion hole in the federal budget, an economic forecaster suggests while calling on the Federal Government to carry deficits in order to boost welfare, reduce the rate of the goods and services tax and lower personal taxes.
Treasurer Josh Frydenberg will release the Mid-Year Economic and Fiscal Outlook (MYEFO) later this week, which is expected to show a better bottom line.
In the October budget, Mr Frydenberg revealed a record estimated deficit for this financial year of $214 billion, which was predicted to drop in time but remain at $66.9 billion by 2023-24.
But the pace of the recovery over recent weeks, including a higher-than-expected 3.3 per cent rebound in GDP over the three months to September, surprised many economists.
Deloitte Access Economics’ latest budget monitor suggests MYEFO will show lower spending due to savings on the JobKeeper wage subsidy and other measures.
But there will still be an almost half-a-trillion-dollar budget hole, with an underlying cash deficit of $210.3 billion in 2020-21, $103.7 billion in 2021-22, $76.2 billion in 2022-23 and $51.7 billion in 2023-24.
And while China’s trade war with Australia was hurting everything from lobsters to wine, Deloitte Access Economics partner Chris Richardson said it was “making us money rather than losing it”.
“We’ve more than made that up [that loss] in overall terms thanks to iron ore — and the taxman will be a considerable beneficiary of that,” he said.
Call for Government to step in now the Reserve Bank is ‘offline’
Dr Richardson said central banks around the world had limited influence on economic activity now that interest rates were at or near zero.
Australia’s cash rate remains at a record low of 0.10 per cent and Reserve Bank Governor Philip Lowe has said interest rates will remain low for at least the next three years.
In that context, Dr Richardson said the Federal Government needed to continue to use whatever levers it could to propel the economy.
“Until now, budgets could concentrate on longer-term issues and leave the Reserve Bank to handle the ups and downs of the economy by raising or lowering interest rates,” Dr Richardson said.
“The machinery that helped run the Australian economy until now is broken and we need to think differently about how we manage the economy until the Reserve Bank is back online.
“But it may be a number of years before the Reserve Bank is back online.”
He said the Federal Government would need to think about introducing temporary relief including boosting welfare spending, temporary cuts to the goods and services tax (GST) and further personal income tax cuts.
“The conversation needs to be, can the Government provide some help?” he said.
“The difficulty with that is that governments aren’t used to thinking about it. And the public, the media and the Opposition aren’t used to thinking about it.”
MYEFO expected to show an improved Budget bottom line
Dr Richardson said extending the JobSeeker Coronavirus Supplement, at a lower rate of $150 per fortnight until March 31, came at a cost of $3.2 billion this year.
There was a further $240 million put into extending the HomeBuilder grant until the end of March (although the current rate is due to reduce after December 31).
But there would be spending savings as JobKeeper and other stimulus measures taper off.
At the same time, MYEFO would show higher tax receipts with more people in jobs, and higher-than-expected profits, especially off the back of the high iron ore price.
“And that’s true even though a range of new spending has been announced since the budget, including on vaccines (as well as vaccine manufacturing capability), at a cost of $1 billion over 12 years,” Dr Richardson said.
“Accordingly, the cash underlying deficit may beat the budget-time expectations for it by some $3 billion in 2020-21.
“That outperformance — versus the [earlier] official forecasts — may lift to more than $15 billion by 2023-24.”
Dr Richardson said Treasury were conservative forecasters, “and they’ve become even more careful about building wriggle room into their budget forecasts during COVID”.
Debt and deficits no longer as big a deal as they were pre-COVID
Deloitte Access Economics sees the economy larger than what Treasury projected by $33 billion in 2020-21 alone, a gap that widens to $106 billion by 2023-24.
It forecasts revenue gains of between $5.2 billion (in 2020-21), lifting to $14.7 billion (in 20233-24), helped along by the higher iron ore price and faster-than-expected recovery from the COVID crisis.
Spending will be $1.9 billion in 2020-21, with savings on JobKeeper from the healthier economy more than offset by the cost of extra policy spending, including on extending the end date of the Coronavirus Supplement and HomeBuilder, plus extra vaccine spending.
Dr Richardson said deficits were no longer as big a deal as they used to be.
The fact the credit ratings of Victoria and NSW had been recently downgraded was not a measure of the quality of budget settings.
“They merely assess the risk that those who lend to governments will be repaid,” Dr Richardson said.
He said governments needed to continue to spend to lift economies out of crisis.
“You’d much prefer to live in an Australia in which governments do the right thing by Australians in a crisis, rather than hurting the economy so as to help the repayment prospects of bondholders,” he said.
Last week CBA released analysis saying that the faster-paced recovery, higher iron ore earnings and less demand for JobKeeper would drive the 2020-21 deficit down to $204 billion.