Pandemic produces stark choice between balanced budgets or services

Pandemic balanced budget surpluses services covid Australia government debt
Government debt is still growing fast and is expected to peak at $1 trillion in 2025.

A lot of things have been left to slide due to the pandemic and one of them is the intergenerational report.

The last one was released by then Treasurer Joe Hockey in 2015 and another was due to be produced last year but amid the lockdowns and general chaos left by the pandemic, it will now be released in June.

Much has changed between these reports which look at the budget in a 40 year time frame and this one will probably outline what has become a stark choice for Australia – a future of strict budget discipline or one with growing deficits and better government services.

The pandemic has directly caused Australia to drift towards the second choice by both directly causing a large and enduring blowout in the budget but also because the surplus at all costs mentality of the Hockey era has been replaced by substantial extra spending in areas such as aged care, childcare, defence, health and the NDIS.

Budget surpluses replaced by deficits as far as the eye can see

Where the 2015 intergenerational report predicted budget surpluses by now and well into the future, the latest budget painted a very different scenario of deficits as far as the eye (and the forward estimates) can see, starting with a $161 billion this year.

Instead of growing surpluses, we now face at least a decade of budget deficits and Government debt which is due to peak at almost $1 trillion in 2025 – and that too could be a rosy forecast.

Government debt still growing fast

Net government debt was supposed to be getting smaller at about 6% of GDP but instead it is predicted to hit up to 41% of GDP and is still growing.

The pandemic explains part but not all of that, with the current Morrison Government embracing large deficits and new spending programs with an enthusiasm that would be shocking to the debt and deficit obsessed Abbott/Hockey regime or even the Howard/Costello era.

They might all be on the same side of the political fence but the pandemic has unleashed a relaxed attitude to deficit spending that will now be very hard to step back from.

Labor also faces challenges

It has also created a dilemma for the Labor side of politics.

While they are no doubt outraged that their GFC spending was pilloried by the Liberals and then resoundingly outspent during the pandemic, they too have a stark political choice.

Faced with what now appears to be a “Labor lite” government at least on the matters of debt and the economy, do they go harder and promise even more spending and higher deficits or perhaps double back and cast themselves as the more conservative economic managers in the mould of the Hawke/Keating years?

It is a tough choice and one that is not made any easier by the lack of clear direction within the voting public itself which always welcomes new spending initiatives that benefit itself but is also conscious of the need to keep some sort of limit to deficits to avoid leaving a massive burden for future generations.

Australia is older, sicker and smaller than anticipated

The delayed intergenerational report is likely to add further context to this debate, with the likelihood it will lay out a picture of Australia as a country that is getting older and sicker, with stagnant wages and productivity growth and an already large and growing level of government debt.

Add in record levels of private consumer debt and a lack of immigration both temporary and permanent due to the pandemic and it is a vastly different scenario than the one painted back in 2015.

That lack of immigration also exacerbates the ageing of the population and reduces the numbers in paid work and available to fill labour shortages.

Renewed economic growth is one hopeful sign

The one bright light that the pandemic has shone is on the ability of the Australian economy to bounce back quickly, with the devastation of the prolonged period of lockdowns being followed by a very strong growth recovery.

Should Australia make good progress against COVID-19 – which is still open to debate given our slow vaccination rates and continuing inability to run hotel quarantine without leakages – then there is a hope of a solid and enduring economic recovery.

A solid recovery to higher rates of growth has the ability to cover a wide range of debt and spending problems.

However, it would not take too many disturbances for the 2021 intergenerational report when it is released to again prove to be taking an optimistic view that will vary quite substantially from reality by the time 2026 rolls around.

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