Economists forecast Australia’s deficit to be better than expected in budget update

Economists at two major banks are betting on a better than expected outlook for the Australian economy to be revealed this week.

Economists predict the federal government will paint a better than expected outlook for the Australian economy, which has proven resilient throughout the coronavirus pandemic.

ANZ economist Cherelle Murphy said the Mid-Year Economic and Fiscal Outlook, expected to be released by Treasury this week, would likely show a better bottom line for the federal budget.

The major bank expects Australia’s underlying cash balance for the 2021 financial year to be $10bn better off, which would bring the projected deficit down from $214bn to $204bn.

Westpac’s economic department is also expecting the deficit to be “trimmed” to about $200bn.

In its October budget, the federal government anticipated a huge deficit blowout from the dramatic increase in spending to stimulate the economy while it grappled with the COVID-19-induced recession.

The Morrison government is expected to give its economic update this week. Picture: Sam Mooy/Getty Images

Gross domestic product (GDP) in the June quarter dropped 7 per cent as result of the lockdown, forcing the economy into its first technical recession since 1991. GDP in the September quarter rebounded 3.3 per cent.

Ms Murphy said the primary driver for the revised upward estimate was fewer businesses needing to access assistance packages such as JobKeeper.

“The government has said 450,000 fewer than-expected employers are eligible for it because of improved trading in October,” Ms Murphy said.

“This means this policy will cost the government around $10 billion less in the December and March quarters than expected at the time of the budget.”

ANZ also noted higher exports and stronger iron ore prices were boosting revenue, which would add billions to the bottom line and lower the government’s debt burden.

ANZ predict the budget deficit to fall by $10 billion. Picture: NCA NewsWire / Gaye Gerard

“Sensitivity analysis in the budget suggest the unexpected spike in iron ore prices could add billions to the bottom line, although how prices, iron ore export volumes and the AUD behave through the rest of the year (compared with Treasury forecasts) are also important determinants,” Ms Murphy said.

Ms Murphy noted the extension of the coronavirus supplement payment to JobSeeker recipients would be an additional cost to the government’s $3.2bn deficit, as would the extension of the HomeBuilder scheme to March 31, 2021.
New orders for coronavirus vaccines are also expected to cost the federal government an extra $600m.

Originally published as Economists forecast Australia’s deficit to be better than expected in budget update