Posted: 28 Jul. 2020 5 min. read

COVID fiscal cost

Weekly economic briefing

Last week, the Federal government released its much anticipated economic and fiscal update. It confirmed what we already knew – that COVID-19 has seen the single largest disruption to our way of life and economy since the Second World War. And this certainly reflected in the figures. Deloitte’s detailed review of the update can be found here.

The official forecasts for growth in the economy very much reflect the COVID recession – real Gross Domestic Product (GDP) is expected to have fallen by 0.25% in 2019-20, with the COVID-hit June quarter more than wiping out previous gains. The economy is then forecast to contract by 2.5% in 2020-21 as the country climbs only slowly out of the COVID hole, and weak consumer and business confidence weigh heavily on activity. This also factors in Victoria’s economy starting to open up again from late August, although a projection that remains highly problematic.

The unemployment rate is expected to peak at around 9.25% in the December quarter of 2020. Unemployment tends to increase faster than it decreases, and as a result, the rate is likely to remain above pre-COVID-19 levels for several years. The loosening of conditions in the labour market will weigh on already sluggish wage gains, which will in turn see little growth in inflation over the next year.

 

Key economic forecasts

 

The combination of a plunge in government revenues as a result of the weaker economy, and an unprecedented amount of government wage support and stimulus spending, sees a large hit to the Federal budget, with an underlying deficit of $85.8 billion forecast for 2019-20 (and compared to an estimate of a $5.0 billion surplus in the pre-COVID mid-year economic and fiscal outlook (MYEFO), delivered December 2019.

 

The underlying budget balance

 

Net debt is estimated to be $488.2 billion at 30 June 2020, an increase of almost 25% on the levels expected in the MYEFO, and forecast to increase by almost 40% in the current financial year, reaching $677.1 billion at 30 June 2021.

While this is a remarkable change from Australia’s typically low deficits and low levels of public debt, it is affordable; and it is the right thing to do given the challenges facing the country.

It is worth remembering that a large share of the increase in public debt over the next few years isn’t due to emergency measures, it is because the weak economy leads to losses in revenue. Since the MYEFO, parameter and other variations have reduced tax receipts by $91 billion over 2019-20 and 2020-21 – led by falls in personal income tax, company tax and the GST.

That means that the best way to fix the budget is to fix the economy. And the best way to do that is to control the virus. Pretty much all of the big questions as to what happens next – for our health, our finances and for the budget – will depend on what happens next in Melbourne.

More about the authors

David Rumbens

David Rumbens

Partner, Deloitte Access Economics

David is a macro economist with extensive experience in applied economic and quantitative analysis of the Australian economy, along with considerable experience in labor market analysis.  David is a regular commentator on macroeconomic trends, and prepares a weekly economic briefing newsletter.

Sheraan Underwood

Sheraan Underwood

Manager, Deloitte Access Economics

Sheraan is a manager in the Macroeconomic Policy and Forecasting team at Deloitte Access Economics. He works across Deloitte Access Economics key publications including Investment Monitor, which provides detailed data on major business and government investment projects in Australia.