Record budget deficits loom for Australia as debt begins to soar

Numbers never lie although they are dependent on the maths of the person doing the interpretation but there is little the Morrison Government can do to massage the bleak picture created by the COVID-19 pandemic.

Instead of announcing the first budget surplus in more than a decade this financial year, the tale of the tape from the Finance Department will instead unveil the biggest ever Federal Government deficit was recorded in 2019-20.

And next year is looking much worse, with some observers tipping next year’s deficit will pass $200 billion, with this year’s number likely to come in at around $85 billion.

Deficit set for a record

By the end of May the deficit had reached $64.9 billion and you can bet that June has only added to the red ink given the trajectory was a budget deteriorating against forecasts by almost $1 billion a day.

In contrast, the previous record Budget deficit was $54.5 billion, set in 2009-10 in the wake of the global financial crisis.

It is not hard to see why the Budget projections collapsed so spectacularly, with the response to the pandemic slashing revenue while dramatically boosting spending.

All revenue lines smashed by pandemic

Personal income tax, which is by far the biggest single contributor to the government coffers, was $5 billion below projections at the end of May.

That is understandable given the large number of people who became unemployed and relied on either the JobKeeper or JobSeeker payments.

Company tax collections were also slammed – dropping almost $10 billion behind the government’s forecasts – a number that is expected to increase once companies begin to offset their tax bills with losses incurred near the end of the financial year.

Everywhere else you look on the revenue side it is a similar story – superannuation taxes are $1.4 billion below forecast, customs duties are $930 million below and excise revenue is $600 million below.

The pain will certainly also be shared by the State governments and territories with the GST revenue that they share running about $4.9 billion below forecasts.

Spending much higher than forecast

On the spending side, the Government has been forced to rapidly ramp up payments in an attempt to reduce the impact of the recession on the country and also on the long-term outlook for the Budget, which relies on keeping as many people employed as possible.

It depends on which economist is your favourite forecaster but many are predicting that the Federal Government will have to ramp up spending even further in 2020-21.

They think that income support measures will need to be greatly extended for some industries such as aviation and new forms of stimulus payments implemented to bring the economy back to health.

Government spending to the end of May was estimated to be $32.9 billion ahead of expectations, with social security and welfare spending reaching a staggering $176.9 billion – swallowing up almost the entire spending forecast on its own.

As expected, JobKeeper and JobSeeker are costing billions of dollars each month that were not part of the original Budget projections.

Debt rising fast and will be with us a long time

As you would expect, the combination of failing revenue and runaway spending has resulted in a boost to government debt with total government liabilities at $1.3 trillion by the end of May – $300 billion higher than expected.

Net debt has hit a record $463.7 billion compared to $373.6 billion in the previous financial year, virtually destroying the Morrison Government’s stated aim of clearing all government debt by the end of the decade.

The Finance Department numbers are sobering but few are arguing that the Federal Government has been spending too much – indeed much of the economic commentary is urging them to ramp up spending now that interest rates have effectively reached their lower limit and the economy still needs stimulus.

The key to how the Federal Government will react to such calls will be announced by Treasurer Frydenberg in an economic update in late July, with the 2020-21 budget now due to be released in early October.