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'Budget bent but not broken': Analysts urge Frydenberg not to scrimp on stimulus
By Shane Wright
The coronavirus recession has bent but not broken the federal budget, one of the nation's chief forecasters believes, as economists urge Treasurer Josh Frydenberg not to scrimp on stimulus measures despite facing a deficit of $200 billion.
As Mr Frydenberg spent the weekend working on the finishing touches to his budget speech, to be delivered to Federal Parliament on October 6, Deloitte Access Economics said it expected the Treasurer to unveil a deficit of at least $198.5 billion.
Treasurer Josh Frydenberg (left) and Finance Minister Mathias Cormann will deliver the largest deficit on record next week, but economists say they should not scrimp on spending.Credit: Alex Ellinghausen
Deloitte's forecast, which does not take into account any extra stimulus spending announced on budget night, also points to ongoing issues.
It is expecting a deficit of $45.1 billion in 2021-22, which is likely to be an election year. The following year, the deficit is tipped to be $25.6 billion.
Revenue in 2022-23 is forecast to be about $40 billion lower than was predicted in last year's budget as the coronavirus pandemic leaves a hole in tax collections.
Deloitte director Chris Richardson said that while the numbers were large, they had to be considering the amount of support the economy needed to extricate itself from the recession.
He said much of the government's spending so far did not have a long-term impact on a budget that would ultimately recover.
"The budget is badly bent, but it's not broken," he said.
"Today's emergency policy measures are temporary. When they're gone, the budget will still be running big deficits, but that will be because the economy is still weak."
Mr Frydenberg is expected to announce plans to pull forward tax cuts, slated to begin in mid-2022; a business investment allowance; and an increase of at least $10 billion in infrastructure spending.
Mr Richardson, who said the planned tax cuts would assist the economy, urged the government to focus on measures to drive down the jobless rate, which Deloitte is expecting to average 8 per cent during 2021-22.
Deloitte Access Economics director Chris Richardson is predicting a deficit of at least $198.5 billion, but maintains the budget will recover from the recession.Credit: Alex Ellinghausen
"Getting unemployment back down again is going to be hard," he said.
"In every other recession and recovery you've seen, the Reserve Bank could always do more if it needed to. But not this time."
Mr Frydenberg said the government was already providing a record amount of support to the economy and would outline even more assistance in the budget.
“The Morrison government will continue to support Australians through COVID-19, and next week’s budget will focus on our economic recovery and creating jobs to secure Australia’s economic future," he said.
But opposition finance spokeswoman Katy Gallagher said although the government had to spend money on programs to support the economy, it had to be careful with its expenditure and get value for money.
"Any new spending is borrowed money – it can’t be wasted on mates or rorts or dodgy deals or pork-barrelling," she said.
A Sydney Morning Herald and Age special Scope survey of some of the nation's pre-eminent economists found strong support for a string of measures to boost the economy including an increase in infrastructure spending, a permanent lift in the JobSeeker payment and support for the housing sector.
While many backed pulling forward the stage two tax cuts, which include lifting the 19 per cent bracket threshold to $45,000 from $40,000 and the 32.5 per cent bracket threshold to $120,000 from $90,000, some cautioned this was unlikely to boost consumer spending.
Bankwest Curtin Economics Centre deputy director Rebecca Cassells said the government should use some of its stimulus spending on childcare.
Associate Professor Rebecca Cassells says the government would get a triple benefit by using the budget to invest more heavily in childcare.
She said a boost to childcare would help women re-enter the workforce and improve the educational outcomes of scores of children.
"Making childcare more affordable also has the potential to deliver a third dividend through population growth, which will become one of the economy's biggest challenges going forward, especially with our ageing population structure," she said.
RBC chief economist Su-Lin Ong said any stimulus measures in the budget had to create jobs and boost confidence among businesses and consumers.
She said there was a strong economic case for the government to invest in social housing or build-to-rent incentives, while bringing forward the stage two tax cuts due to start in mid-2022 would also deliver ongoing benefits.
"Straddling low- to middle-upper-income earners, they will permanently boost household income [rather than one-off payments] and contain a reform element via simplifying the tax system,
making it more competitive and increasing the incentive to work," she said.
BIS Oxford Economics chief economist Sarah Hunter said the government should look overseas to successful time-limited, consumer-focused programs that encouraged spending.
"Other countries have tried non-traditional policies, such as the UK’s 'Eat Out to Help Out' scheme, which have been very effective at stimulating consumer demand," she said.