budget is getting better very fast – a hundred billion better

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Deloitte Access Economics: the budget is getting better very fast – a hundred billion better

13 December 2021: COVID costs have hurt the budget badly, but this Thursday’s half year report card for the budget is set to show a hundred billion dollar improvement over earlier expectations.

As recently as 2 November, our Budget Monitor estimated the improvement in budget balances since May’s budget would be $45 billion over the four years to 2024-25. But Deloitte Access Economics partner Chris Richardson said: “Our latest assessment is that Thursday’s budget update will reveal lower cash underlying deficits to the tune of $103 billion.

“That’s remarkable, given everything that’s gone wrong in the seven months since the budget was released, including Delta’s dawn, iron ore’s collapse, and multi-billion dollar rescue packages,” he said.

So how can the news be so bad, and yet the budget be $103 billion better? Four factors stand out:

  1. Resilience and recovery: The economy has been recovering much faster than Treasury assumed seven months ago. Even when Delta locked down half the population, the damage to the economy was just a fraction of that in mid-2020. Given that the best way to repair the budget is to repair the economy, that combination of resilience and recovery is helping the budget get its mojo back. The international evidence is similar – when nations get sufficiently ahead of COVID for their economies to open up, their tax revenues rise fast. As the chart below shows, we’re part of a global trend.

  2. We fought Delta on a tight budget:  Delta-driven policy costs were a very small fraction of the dollars we racked up the first time around.  Partly that’s because the federal government pushed more COVID costs on to the states during Delta, and partly it is because Treasury knows that families have saved almost a quarter of a trillion dollars more than usual since COVID hit – money that is helping to power the current recovery.
  3. Australia’s great effort on vaccinations will deliver a recovery that’s more reliable:  Living COVID-free is wonderful, and it’s great for economies and for budgets.  But it is also fragile – unless we’re really well vaccinated, COVID can kick the door down very fast.  So Australia’s surge in vaccinations since early August is really good news for both the economy and the budget.  It says Australia’s path from here on is safer and more reliable than that of less vaccinated nations.
  4. Treasury forecast agony for the economy, whereas we only forecast pain:  It isn’t that our forecasts for the economy and the budget are sweetness and light.  The official forecasts assume a steady recovery from the car crash of COVID.  But they also assumed export prices – for iron ore in particular – were set to crash.  So Treasury’s budget-time assumptions saw the nominal economy travelling at crawl speed across an unusually long period of time.  Across the six years between COVID arriving (near the end of 2019-20) to the end of the forward estimates (in 2024-25), Treasury sees national income growing at an annual average rate of just 2.8%, whereas we see 4.2%.

At budget-time Treasury forecast four years of cash underlying deficits that totalled $342 billion. Deloitte Access Economics partner, Stephen Smith, said: “Provided Omicron doesn’t send many Australians back into lockdown for lengthy spells, then continuing rapid repair in the economy will generate rapid repair in the budget.  We’re forecasting four years of deficits totalling $239 billion.

“Rapid budget repair is great news.  But better outcomes for the budget don’t mean that leaves room for big promises in the coming federal election.”

Richardson sounded a note of caution. “The budget recovery is remarkable.  Yet it’s not enough.  A range of commissions and reports indicate that Australia government spending is still in catch up mode for aged care, disability and mental health.  And at the same time the world has become more dangerous for Australia, so Defence costs have some catch up ahead too,” he said.

“That says the budget will be under pressure for some years to come.  If you’re hearing costly promises from politicians in the months ahead, they should be treated with considerable caution.”

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Simon Rushton
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