The Federal Budget has benefited from Australia’s ‘world class’ defence against the coronavirus
Australia’s “world class” defence against the coronavirus has put the federal budget in a far better position than was expected six months ago.
The federal government will release its Budget next week, on May 11.
It will show government revenues have increased dramatically in recent months as the labour market has recovered quickly, business profits have soared, and confident families have spent up a storm.
According to Deloitte Access Economics’ latest ‘Budget Monitor’, which has looked closely at the state of the federal government’s Budget, government finances are clearly benefiting from a healthier economy.
A healthier economy, a healthier budget
It says government revenue, for 2020-21, could end up $21 billion ahead of the forecast in Treasury’s recent budget update in December.
It says national income could be $31 billion stronger in 2020-21, $85 billion stronger in 2021-22, $102 billion stronger in 2022-23, and $114 billion stronger in 2023-24, than Treasury was forecasting.
And because of the surprise strength of the economic recovery, the amount of deficit spending required by government to support economic activity will be much less than forecast.
It estimates an underlying cash deficit of $167 billion in 2020-21, which is $31 billion smaller than Treasury was forecasting in December.
For 2021-22, it estimates an underlying cash deficit of $87 billion, which is $22 billion smaller than Treasury was forecasting.
In fact, over the next four years, Deloitte says the Budget’s accumulated deficits could be $98 billion smaller than Treasury estimated “just a few months ago.”
“The remarkable recovery has left official forecasts well behind,” Deloitte says in its Budget Monitor, released on Monday.
“Compared to Treasury, we see the economy in 2020-21 and 2021-22 as having much lower unemployment, but stronger inflation, a higher currency and higher long term interest rates.
“They’re all the result of a happier economy.
“In total, that saves money. But it is the sheer size of that saving that stands out, because better job and joblessness news saved much more than usual, boosting the budget bottom line by a mammoth $17 billion in 2020-21, and then by a further $3 billion in 2021-22.”
The budget will show how far we’ve come
Next week’s Budget will be delivered in a unique context.
It will be the first full-year Budget after the 2020 pandemic, and it will be delivered by a federal government that has been forced by circumstance to upend its usual approach to Budgets.
After years spent warning about “debt and deficits”, the government has accumulated the most debt of any in Australia’s history, and recorded the largest budget deficits.
It has also dropped its obsession with Budget surpluses, saying it now wants to prioritise economic growth in coming years, and that by growing the economy strongly over the next decade the debt-to-GDP ratio will decline naturally.
“That’s the right policy aim,” the Budget Monitor says.
In that sense, next week’s Budget will be a record of the evolution that has occurred, in the last 12 months, in the government’s thinking.
The Budget will also be a record of the efforts of some economists who argued that, if authorities prioritised the health of the community during the pandemic, and the federal government introduced a wage subsidy scheme to pump cash into workers’ pockets through the lockdowns, then the economy could bounce back strongly on the other side.
Deloitte Access Economics says it has been a “red hot recovery.”
“It still seems to come as a surprise to many that global growth is recovering fast, that Australia’s world class defence against the virus has us near the front of that pack, that Australian living standards grew faster than their decade average through 2020, that we are the first (and so far only) advanced nation to have more jobs now than before the pandemic, and that overall job momentum is set to be only temporarily disrupted by the end to JobKeeper,” it says.
“To be clear, the economy remains under a lot of pressure. But that pressure is much less than official forecasts had factored in.”