Terry McCrann: The b`udget deficit we have to have
On Thursday Treasurer Josh Frydenberg will tell us the huge budget deficits we now face, while simultaneously forecasting that the economy will bounce back strongly this fiscal year. But all forecasts hang on whether the virus subsides, writes Terry McCrann.
Terry McCrann
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On Thursday Treasurer Josh Frydenberg will formally catalogue the huge budget deficits we now face.
Although he won’t have the full and final figures, the deficit for the fiscal year just ended will be estimated as going well above $100bn.
In the 11 months to the end of May the deficit had reached $65bn, after being just $22bn in the nine months to the end of March.
That’s when the huge spending, especially on JobKeeper, kicked in while tax revenues, and especially for company tax, would have started plummeting.
This will be the deficit we got for just three months of dealing with the consequences of — to be exact — not the virus itself but the deliberate decision to fight it by sending the economy into its worst recession in nearly 100 years.
This is not a criticism of the nationwide lockdown, simply a statement of fact. It’s also importantly a statement of the obligation that the government — all governments, including state ones but especially the federal one — assumed on behalf of us all.
The government quite deliberately and specifically ordered the destruction of tens of thousands of businesses and hundreds of thousands of jobs — with very real human costs over and above the financial ones.
It had to and has assumed significant financial responsibility for — bluntly, only partially — offsetting that. It is a responsibility that does not end with the – hoped-for — end of the lockdowns if not the end of the virus itself, but will continue well into if not all the way through the 2020s.
In the new 2020-21 financial year that has just started, Treasurer Frydenberg will project a deficit well above $200bn.
The deficits projected for the subsequent 2021-22, 2022-23 and 2023-24 years will be much smaller, but still huge relative to recent years.
He might project that “sometime” after these formal budget projections, the budget will get back to balance and even surplus. If he does, it will be utter fantasy; the budget is going to stay in — significant — deficit pretty much for ever.
And let me make a very, very important point. All these numbers will be based on the assumption that we — and indeed the world — gets “on top of the virus” and stays essentially on top of it, either with a vaccine or effective treatments.
More specifically, it will assume that Victoria’s Lockdown 2.0 will only last the six weeks scheduled and that it will not be repeated. And just as importantly that no other state and especially not NSW gets forced on to the same course.
At least Frydenberg — and the other 25 million of us — start the week with encouraging news on the Victorian disaster, with recorded cases nearly halving to just over 200 on Friday testing. That’s of course encouraging on the virus, but also for the economy and Frydenberg’s budget numbers. But we have been “encouraged” before.
Further and importantly, these numbers only talk about the federal budget. Every state budget is going to plunge into similar, if smaller, deficits, with a consequent similar leap in debt.
Gross federal debt is headed for a trillion dollars — and stages higher, as I don’t see a budget surplus, the only real means of cutting it, pretty much ever. Victoria’s net debt will go past $100bn.
Do these debts and deficits matter? They certainly do.
But one doesn’t have to sign on to the childish so-called Modern Monetary Theory or MMT to argue they won’t destroy the economy like we thought they threatened to do through and after the GFC.
It’s both very simple and very complicated, and a subject for another column.
Let me just note that the idea that governments can get away with endless deficits, with the Reserve Bank just printing the money, is the belief in a permanent free lunch. It also fundamentally corrupts the critical price and value signals that make an economy function.
But all that aside, right now so far as the deficits are concerned, the overriding point is that we don’t have any choice.
We are going to get them; every country is going to get them. At least we started the whole business — GFC + virus — with near zero debt. Be thankful for (very big) small mercies like the now $162bn former treasurer Peter Costello salted away in the Future Fund.
The Treasurer won’t only be giving us budget projections; he will also be detailing the treasury forecasts for the economy.
They will have the economy bouncing back strongly this fiscal year. But as I noted, with the mother-of-all asterisks: assuming Victoria does not repeat and does not go national and the virus globally subsides.
Here’s hoping.
Originally published as Terry McCrann: The b`udget deficit we have to have