Virus sprint and recovery marathon

Earlier today, Treasurer Josh Frydenberg gave his Ministerial Statement on the Economy ­to Parliament – a mini budget to replace the real deal that’s been delayed until October by the pandemic crisis.

And if a delayed budget wasn’t a giveaway of the troubles that lie ahead, the figures released today certainly do.

In his speech, the Treasurer stated:

“Household consumption and business and dwelling investment are all forecast by Treasury to fall sharply in the June quarter. The combination of social distancing, lower incomes and increased uncertainty are weighing heavily on aggregate demand and flowing through to reduced cash flow. Household consumption is expected to be around 16 per cent lower. Business investment is expected to be around 18 per cent lower with falls concentrated in the non-mining sector. Dwelling investment is also expected to be around 18 per cent lower.

Overall, the economic data has been sobering.”

This week’s release of Deloitte Access Economics’ Budget Monitor provides guidance on what these economic conditions may have meant for the budget had it been delivered at this time.

Overall, the budget is taking a series of staggering blows. We begin our economic recovery with unemployment high, the private sector scared, the Reserve Bank tapped out, and prices for our key exports weak.

• Families and businesses have had body blows to their confidence, their income, and their wealth. So, they’ll be more cautious about taking risks – which is why we forecast business investment to drop more than any other part of the economy.
• The Reserve Bank is already pedal to the metal, meaning this is the first recession-and-recovery that you’ve lived through in which the RBA is essentially already out of ammo.
• Australia will be outperforming the global economy. But that global weakness may undercut the prices we receive for our resource exports – as is already notably true for gas.

Underpinning these forecasts is both an increase to expenditure and a decrease to revenue.

On the revenue front:

• Fewer workers and lower incomes (many wages are down to JobKeeper levels) mean personal taxes take the biggest hit compared with official forecasts, down a huge $14 billion in 2019-20, and then an even larger $37 billion in 2020-21.
• Profits take a pounding as well, meaning profit taxes look set to fall shy of the official forecasts by $8 billion in 2019-20 and $26 billion in 2020-21.
• Australians are reducing spending during the lockdown, partly because we can’t spend (as options are restricted), and partly because we’ve lost the income to spend with anyway. The biggest impact here is on the GST. That sees indirect taxes drop $6 billion shy of official forecasts this year, and a further $10 billion next.

On the spending front:

• All up, $209 billion of policy announcements have been made, almost all adding to spending rather than cutting revenue. That includes the massive $130 billion JobKeeper policy. But we estimate the actual cost of fighting to protect lives and livelihoods may weigh in at $199 billion – still stupendous, but a little less than announced.
• The recession also adds to spending amid higher unemployment, increased government borrowing, and a lower $A. But the impact of these automatic stabilisers is pretty small amid the budget dramas of the moment, as there are largely offsetting savings via weaker wages and prices and lower interest rates.

We estimate the increases in spending and hits to revenues will result in a $143 billion underlying cash deficit this year, followed by $132 billion next year. Our estimates are $148 billion and $138 billion, respectively, worse than official estimates of cash balances in last year’s Mid-Year Economic and Fiscal Outlook (MYEFO).

These numbers are scary. But there are things we can do as a nation to help.

Australia needs to see a combination of ‘going hard’ (ongoing policy support) and ‘going smart’ (unlocking reform). On the latter front, if we want to give our newly unemployed the best chance of getting their livelihoods back, then we need to be the smart nation that we’ve so often talked about. That means championing a new round of bold economic reforms.

That will give businesses – big and small – a reason to take bigger bets on the future, unlocking more investment, and with it the potential for more job gains. If we want more growth, then it makes good sense to raise the economy’s growth potential.