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Deloitte Access Economics’ latest Budget Monitor shows that this year’s budget deficit is holding up better than might have been expected.
The last official federal budget update was released before Melbourne’s Stage 4 lockdowns and the policy reactions to that, including spending $15.6 billion more via easier eligibility for JobKeeper, as well as another $2 billion to extend telehealth. So you could be forgiven for thinking the worst ...
Yet it’s not all bad news. Treasury assumed iron ore prices would immediately nosedive, almost halving to US$55 a tonne ahead of Christmas, but they’ve actually gone up, trading at double those rates. And Treasury was very conservative in its other forecasts, including of jobs and inflation.
The upshot is that we see better news than Treasury does on personal taxes, partly as we’re a little less pessimistic on both wages and jobs, while profit taxes may also outperform the low bar set for them in the official forecasts.
Yet while the tax take looks set to help the budget this year, the spending story goes the other way. It’s dominated by the extra costs driven by lockdowns in Melbourne and regional Victoria.
The bottom line? We forecast this year’s underlying cash deficit at $198.5 billion, ‘just’ $14.0 billion worse than Treasury forecast back on 23 July. All in all, that’s a pretty good outcome. But remember a key caveat: our forecasts assume no new policies are announced, even though policy should do more.
And future deficits are less scary than many are expecting. Today’s emergency spending is designed to phase out in later years, while lower wages, lower prices, and lower interest rates all generate savings. So too will reduced state grants given GST weakness, although ongoing joblessness raises spending.
In ordinary times we would worry about the debt. Yet these aren’t ordinary times. And although the increases in debt are very large, the falls in interest rates are even larger. That’s a game changer.
Our forecasts indicate that, in June 2023, federal debt will be $401 billion higher than Treasury’s pre-COVID forecasts for it. But we also forecast that the cash cost of interest paid by the government will be $2.4 billion lower in 2022-23 than it was in 2018-19.
Although interest costs won’t have fallen as much as had been hoped pre-COVID, that gap (of $1.6 billion in 2022-23) is the equivalent of an ongoing cost to the average taxpayer of just $2.66 a week. For not much more than the cost of a sausage sandwich at Bunnings, that may be the biggest bargain you’ll ever score.
This story hasn’t finished, of course. Australians should look to the budget on 6 October to continue the defence of our livelihoods, but to gradually change gear from protecting old jobs towards creating new employment opportunities.
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.