Australia’s deficit to improve in mid-year economic update

Treasurer Josh Frydenberg says the updated numbers are encouraging and better than what was expected 10 weeks ago.

Australia’s eye-watering budget deficit has scraped in below $200bn as the nation recovers from the coronavirus pandemic.

Treasurer Josh Frydenberg said the budget update confirmed that the Australian economy was rebounding strongly following the biggest economic shocks since the Great Depression.

“Australians are back spending and they are back working, and they are back moving freely across the nation,” he said.

“But the road ahead is challenging … our recovery is very much dependent upon our continued success in containing COVID-19.”

Australia now has a $197.7bn deficit, or 9.9 of GDP in 2020-21.

Mr Frydenberg said that was an improvement of $15.9 billion in the two months since the budget, which forecast a $214bn shortfall due to the coronavirus pandemic.

Net debt stands at $690bn and is expected to peak at 43 per cent of GDP in 2024.

“It is going take a long time to pay back that debt,” Mr Frydenberg said.

“But Australians should know that the money that has been borrowed and spent during this crisis have helped save hundreds of thousands of jobs.”

Mr Frydenberg said the unemployment rate was expected to return to pre-COVID levels in around four years and predicted the jobs recovery would be faster than after recessions in the 1980s and 1990s.

Treasurer Josh Frydenberg says Australians are back spending. Picture: Gary Ramage

Moody’s Investors Service vice-president Martin Petch said the improvement reflected a solid economic recovery but substantial risks remained while the global economy grappled with the pandemic.

“Significant risks remain around the outlook on Australia as it continues to face a challenge in terms of fiscal repair,” Mr Petch said.

“However, we continue to expect that repair will proceed as the impact of the coronavirus recedes and in line with past experiences of fiscal consolidation following major economic shocks.”

The jobless rate was 6.8 per cent in November – down from the forecast peak of around 9.25 per cent in the December quarter at the last mid-year update.

Unemployment is now forecast to peak at 7.5 per cent in the March quarter of 2021, down from 8 per cent at the budget.

Around 640,000 fewer people on JobKeeper in the December quarter has freed up $11bn worth of taxpayer dollars.

“We have come a long way from Treasury’s initial estimate that the unemployment rate could reach 10 per cent or 15 per cent without JobKeeper,” Mr Frydenberg said.

“This improved outlook is off the back of unprecedented levels of economic support.”

The government was also buoyed by a surprise 3.3 per cent gross domestic product (GDP) rise for the September quarter – the biggest quarterly increase since 1976.

Real GDP is forecast to grow by 4.5 per cent in 2021 following a reduction of 2.5 per cent in 2020.

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Senator Simon Birmingham took over the finance portfolio from Mathias Cormann, who left politics. Picture: NCA NewsWire / Gary Ramage

Record demand for iron ore from China has driven up prices for Australian exporters to more than $US150 ($A214) a tonne last week.

Tax receipts are expected to be $9.5bn better this financial year with GST collections also expected to improve due to iron ore prices and higher forecasts for consumption.

States and territories will also receive a share of a $3.2bn boost to the GST kitty.

The government is maintaining a prudent approach to its commodity price assumptions in the wake of heightened trade tensions with China.

Forecasts for resources exports predict a 5 per cent increase this year, alongside a 2.5 per cent rise in farm product exports.

But Finance Minister Simon Birmingham said the government was not underestimating the impacts of the decisions by China on individual businesses and sectors.

“We know that many individual businesses are still doing it tough and facing particular pressures,” he said.

Mr Frydenberg warned that international uncertainty, including over the timing of a COVID-19 vaccine rollout, was cause for concern.

“There is a very tough road ahead. There is a light at the end of the tunnel, but there is still a very long way to go in the Australia’s economic recovery,” he said.

The economic update also included 10,000 additional home care packages for older Australians, the rollout of vaccines, and the extension of the HomeBuilder program.

Assumptions about slower population growth, negative net overseas migration, and the timing of the opening of international borders remained unchanged.

However, the fiscal outlook is based on state borders remaining open and Australians being vaccinated by the end of 2021.

Mr Frydenberg said any financial concerns at home will prompt Australians to tighten the purse strings.

Scott Morrison has led Australia through dual health and economic crises prompted by COVID-19. Picture: NCA NewsWire / Gary Ramage

Before the economic update, Prime Minister Scott Morrison said his priority was making sure businesses could get off JobKeeper as quickly as possible.

“The biggest thing that will restore the budget … is getting Australians back in work, when Australians no longer need income support from taxpayers and become taxpayers themselves,” he said.

“That is the secret to good strong budget management as well as having a sharp pencil.”

But opposition Treasury spokesman Jim Chalmers said the government seemed “incapable” of understanding what life is like for those 2.2 million Australians who were unemployed or underemployed.

“Today’s mid-year budget update is yet another marketing exercise which doesn’t do enough to ensure that people can get ahead in the recovery and that people aren’t left behind,” Dr Chalmers said.

“The economy is recovering but it isn’t rebounding strongly enough.

“This can’t be another missed opportunity to deal with issues which have been in the economy for so long, like insecure work and stagnant wages, and weak business investment.”

Josh Frydenberg and Simon Birmingham unveil the fiscal update.

Business Council chief executive Jennifer Westacott said Australia needed to lock in the gains in the economic update.

“The government has softened the blow of the worst of the pandemic, now it’s time for the private sector to take over the heavy lifting,” she said.

“To do this we have to drive new investment across the country with the right tax incentives, stop the antiquated industrial relations system working against job creation, wind back unnecessary red tape, get big infrastructure projects happening quickly and fix the skills system so Australians can get the high paid jobs they want.”

ANZ economist Cherelle Murphy on Monday said the outlook would likely show a better bottom line for the federal budget.

The major bank was expecting 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.

The federal government was anticipating a huge deficit blowout from the dramatic increase in spending to stimulate the economy while it grappled with the COVID-19-induced recession.

GDP in the June quarter dropped 7 per cent as result of the lockdown, which forced the Australian economy to enter its first technical recession since 1991.

GDP in the September quarter rebounded 3.3 per cent.