Australia is facing massive budget deficits as far as the eye can see and a big build up in foreign debt after Federal Treasurer Josh Frydenberg unveiled an “optimistic” deficit of $184.5 billion for the current financial year.
That number is based on Melbourne re-opening at the end of the current six-week lockdown – a scenario that seems highly optimistic given that another 403 Victorian cases of COVID-19 were announced at the same time as the budget update.
The budget for 2019-20, which was forecast to be in surplus, was instead a deficit of $85.8 billion.
Economic growth, as measured by GDP, is expected to contract by 0.25% in 2019-20 and a further 2.5% in 2020-21.
Mr Frydenberg said that government spending would become one of the primary drivers of economic activity, due to the unprecedented economic “shock” caused by the coronavirus crisis.
Unemployment is now expected to peak at 9.25% in December this year, despite many private sector jobs remaining bankrolled by the government through the JobKeeper scheme.
Without JobKeeper and other economic measures, unemployment would have topped 14%, or an extra 700,000 jobs.
“During this crisis, fiscal support will be a primary contributor to GDP,” Mr Frydenberg said.
Debt ceiling needs to rise – again
The build-up in government debt has been so fast that Mr Frydenberg said he would seek to raise the current borrowing limit of $850 billion, acknowledging it was set to be breached.
Analysts have said that it will take at least 30 years to work down the now likely trillion-dollar government debt load that has been rapidly built up since the pandemic caused Australia’s economy to crash into recession for the first time in almost 30 years.
The budget position is now the worst since the second world war; however, the rapid recovery after WW2 due to mass immigration is unlikely to be repeated.
Mr Frydenberg said that despite the increase in debt, the government’s interest bill wouldn’t go up because interest rates had fallen.
Jobs shed rapidly
He admitted Australia was facing a “harsh reality” as the private sector contracted sharply.
“Between March and May 870,000 jobs were lost and more than one million Australians saw their working hours reduced, in many cases to zero.”
Mr Frydenberg said he believed Australia would be able to chart a course through the one in a hundred-year situation – “We can see the road ahead and Australia begins the climb.”
“We will get through this, we will get through this together.”
Other possibly optimistic assumptions in the budget included the ban on international traveller arrivals to be gradually lifted from 1 January next year with a two-week quarantine period and the return of some international students.
It was also assumed that apart from Victoria, all other states and territories would follow the planned three step reopening plan without any further setbacks, with state borders reopening soon.
The border between NSW and Victoria is assumed to reopen by 19 August.
Cormann admits position is “challenging’’
Finance Minister Mathias Cormann admitted that the budget position was “challenging” but said Australia was outperforming other countries and was in a “better, stronger, more resilient” position.
He said the government had worked through the economic impact of the crisis in “an orderly response” with the introduction and fine tuning of JobKeeper and JobSeeker to support the labour market.
“We will keep building on our many measures to keep and create more new jobs … with our focus on tax incentives … deregulation … our free trade agenda and much more,” said Mr Cormann.
The recession has cost the budget $32.4 billion in 2019-20 and $72.2 billion in 2020-21, with tax receipts down $31.7 billion in 2019-20 and $63.9 billion in 2020-21.
Australia is expected to be in $851.9 billion of debt at 30 June next year.
Business investment falling fast
Business investment is forecast to have dropped 6% in 2019-20, but will get much worse this financial year doubling to 12.5%.
The pandemic has dashed the Morrison Government’s plans to be “back in the black” and produce the first surplus since 2007-08.
In December, the government had expected to reach a $5 billion surplus in 2019-20 and a $6.1 billion surplus this financial year.
The 2020-21 deficit is about four times the last record, which was $54.5 billion when the Rudd Government tackled the global financial crisis.
Once in a century shock
Mr Frydenberg said the COVID-19 pandemic was a “once-in-a-century shock” and credited the government’s move towards a balanced budget in 2018-19 as giving Australia the “financial fire power” to respond to the virus.
“Australia has outperformed nearly every other country in both health and economic outcomes through this crisis,” he said.
Mr Frydenberg said the $164 billion in direct support measures and a large decline in tax receipts were a “necessary” hit to “cushion the blow” of the pandemic.
Victoria in $7.5 billion deficit
The bad news kept on coming with Victoria’s Treasurer Tim Pallas revealing a $7.5 billion deficit.
Mr Pallas said the economic hit from the pandemic was “devastating.”
“This is grim,” he said. “It’s one of the biggest economic challenges, the state, Australia and the world economy has faced in history.
However, Mr Pallas was confident that the Victorian economy “will make it through to the other side of this pandemic”.
“This will be a very traumatic and dramatic economic event.
“The economic devastation caused by coronavirus is simply eye watering.”
The revised modelling forecast gross state product to fall by 5.25% this calendar year.
Taxation revenue will drop by $8.5 billion across 2019-20 and 2020-21.