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The 2020-21 budget is focused on driving unemployment down as fast as it can. That has seen a raft of decisions to tip new dollars into the economy, covering everything from the ‘bring forward’ of personal tax cuts, to subsidising the wages of the unemployed when they get a job back, through to allowing most businesses to immediately expense their capital spending.
The underlying cash deficit is forecast to be $214 billion in 2020-21, $29 billion worse than forecast in the July 2020 Economic and Fiscal Update, and a staggering $220 billion worse than the pre-COVID forecast released in late 2019 in the Mid-Year Economic and Fiscal Outlook (MYEFO).
The budget unveiled massive hits to the tax take, both in company tax (as profits dive) and personal tax (with jobs lost and wage growth virtually halting).
2020-21 revenues are forecast to be $55 billion lower than the
(pre-COVID) projections in MYEFO.
Yet the moves in spending dwarf those in taxes. The increase in spending is four times bigger relative to national income than in the global financial crisis (GFC).
In response to the GFC, spending rose by 2.4 percentage points of income in the two years to 2009-10. Now, spending is rising by 9.5 points of income in the two years to 2020-21.
Chart: Federal government spending as a share of the economy
Net debt is forecast at $900 billion in 2022-23, while in the MYEFO released pre-COVID, Treasury had projected net debt to be $361 billion in the same year.
Yet it’s what that debt costs that’s much more important. Treasury now forecasts $17.3 billion in interest payments in 2022-23. Strikingly, that’s less than the $19.0 billion we paid in 2018-19.
So the defence of our lives and livelihoods is much cheaper than most realise
Treasury has also pencilled in a rapid economic recovery, with a late 2021 vaccine allowing the economy to average growth of 3.5 per cent in the next three financial years. That rebound in growth is forecast to generate enough jobs to bring the unemployment rate down to 5.5 per cent as soon as mid-2024. And it is at this point that the government will start to worry about the deficit again.
Yet the economic costs will linger. With international borders set to be closed for some time yet, Treasury now projects Australia’s population in mid-2024 to be more one million people smaller than its pre-COVID expectations.
And, largely because of that, it now sees the economy in mid-2023 as around 5.0 per cent smaller than its pre-COVID expectations.
COVID has affected us all, and it has certainly come at a big cost to the economy.
Deloitte’s analysis of the 2020-21 Budget includes a summary of key announcements as well as a deep-dive into topics such as infrastructure, superannuation, personal taxes and business taxes.
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 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.