Time to feel sorry for Treasurer Frydenberg as he sits on a set of fairytale economic assumptions

Budget 2021 Australia Treasurer Josh Frydenberg economy
The Federal budget assumptions appear to have more scope for error than any previous year.

It is never fashionable to feel sorry for any politician, but Australian Federal Treasurer Josh Frydenberg is smart enough to know that his carefully prepared budget could come apart at the seams within months.

There are plenty of rubber figures in every budget but even as he delivered it, Frydenberg must have known that this year has the potential to go off script in a truly epic way.

It is not the many new spending commitments that are likely to be way off beam – although that, too, is possible – but the budget assumptions that have way more scope for error than virtually any previous year.

Key economic forecasts are unusually volatile

The key economic forecasts outlined are particularly volatile and appear to be guesswork such as:

Economic growth will swell to an amazing 4.25% in 2021-22 and then fall to 2.5% the following year.

Unemployment will fall to just 5% and then 4.75% the year after.

International borders will begin to reopen in early 2022 but at low travel levels until the middle of 2022 at the earliest.

The budget deficit will be $161 billion in the coming financial year and net government debt will peak at $980.6 billion in 2024-25.

Iron ore, currently selling above US$200 a tonne (A$255/t), will crunch to US$55/t (A$70/t) in the coming year.

This isn’t the stuff of meaningful forecasts or even dartboards – it is to a large extent guesswork combined with some middle of the plot graphing and wishful thinking.

How very convenient that net debt comes in just under $1 trillion and how very extraordinary that iron ore is about to curl up into a ball and die in the middle of a massive bull run.

I wonder what odds you can get on net debt hitting $1 trillion or iron staying above US$100/t?

Given the interdependence between the key economic numbers the budget turns from a roulette wheel into Tattslotto, with the chances of “winning” so remote that they are virtually negligible.

COVID-19 means we already know the folly of prediction

The reason this year’s budget is such a shot in the dark is that we actually know that the coming year is wildly unpredictable in advance.

Just use a couple of scenarios for the progress of COVID-19 in the coming year and it is easy to see the folly of prediction, particularly when it comes in the form of two decimal point precision.

Scenario one: vaccines are largely successful in reducing the incidence of dangerous disease, and outbreaks around the world are gradually brought back under control.

Scenario two: new and more dangerous and transmissible variants negate vaccine campaigns and cause further mass lockdowns around the world to prevent large scale mortality.

The scale of the difference between these two scenarios in an Australian context is huge and there are any number of other COVID-19 scenarios that could also occur.

So, the budget forward estimates – which, notably, dramatically rewrite last year’s equally off-the-pace forecasts – could be totally shattered by December, or even earlier.

Yet no allowance is made for the extraordinary and particular vagaries of the situation we find ourselves in?

It is amazing when you think about it given that the budget was significantly delayed last year due to the pandemic, but this year when the unknowns are arguably greater, we go back to playing pin the tail on the donkey as if the world has returned to normal.

Even in a conventional year, budget forecasts are a raffle but this year they really need to be read with a giant attached asterisk with more terms and conditions than an “interest free” financing deal.

Frydenberg will be left to wear these potentially ludicrous forecasts

None of this is Treasurer Frydenberg’s fault – although he could have insisted on inserting more wriggle room – but he will be left to wear the egg should the forecasts turn ludicrous, which looks likely.

Also, there is nothing intrinsically wrong with the budget settings he has introduced, steering a middle path somewhere between a Labor-lite budget and a more spending and deficit than usual Liberal/National one.

Many of the spending initiatives in areas such as $17.7 billion for aged care over five years and $15.2 billion for infrastructure over 10 years are laudable, as are improvements to education, training, tax concessions and childcare.

Federal Government will need to stay nimble to win the economy and the election

What this budget does expose though is the need for the Federal Government to remain incredibly nimble and reactive to fast changing circumstances rather than keeping anything above a vague eye on hitting these Treasury guesstimates.

The coming year could require another round of heavy stimulus to keep people employed or the economy could start to overheat under the weight of past stimulus, inflation and current spending.

It is not hard to concoct a scenario for either outcome and the best we can hope is that the Federal Government remains willing to monitor what is happening with unusual care and respond hard and early to whatever the year brings.

Almost certainly, the one thing it won’t bring is the precise set of assumptions that Treasury inserted in the budget.

It will be how the Federal Government reacts to the big changes we know are coming down the pike this year that will seal their electoral future rather than trying to live up to some sort of sparsely drawn comic book future sketched by some pointy headed fantasists.

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