No rapid rebound as Covid four-year budget blow $553bn

The coronavirus recession will wipe $553bn off the federal budget bottom line over four years, according to new forecasts from economist Shane Oliver.

AMP Capital chief economist Shane Oliver.

The coronavirus recession will wipe $553bn off the federal budget bottom line over four years, according to new forecasts from AMP Capital chief economist Shane Oliver, who is foreshadowing a “concerning period of relatively high public debt”.

Budget deficits totalling $529bn over the four financial years to June 2023 are likely, Dr Oliver said in a note on Tuesday, amid expectations of further federal government spending and tax cuts to be announced in the October budget.

“The blowout in public debt is a concern and we may have to get used to a long period of relatively high public debt in Australia and in other developed countries,” he said, pencilling in an increase in gross federal public debt as a share of GDP to 54 per cent from 34 per cent. “Stepped-up economic reforms will help grow the economy but are unlikely to drive a repeat of the rapid post-WWII decline in the budget deficit and public debt,” he added, suggesting much of the “low-hanging fruit” in tax and industrial reform had already been picked.

“The 1950s and 60s rarely saw balanced budgets, let alone surpluses, and so debt was not actually paid off. But the ratio of public debt to GDP fell sharply and by the early 1970s had fallen to 7 per cent of GDP.”

The government’s December economic forecasts anticipated surpluses totalling $29bn over the next four financial years, including a $6.1bn surplus this financial year, whereas Dr Oliver expects a $230bn deficit this year, the largest since World War II as a share of GDP.

Goldman Sachs chief economist Andrew Boak on Tuesday said he expected extra federal and state government stimulus to reach around $70bn over the next two years, including $30bn at the federal level. “The measures are likely to comprise both higher spending and lower taxes, and are likely to be skewed towards the states rather than the federal government,” he said.

Mr Boak said he expected the federal government to bring forward legislated tax cuts to July 1 next year, announce extra infrastructure spending to be administered by local governments, “lock in” the unemployment JobSeeker benefit at $250 a fortnight higher than the old Newstart, and extend the HomeBuilder scheme to the middle of next year. “A further extension to the JobKeeper program – which is due to expire in March 2021 – is also possible.”

Dr Oliver said the budget might include “tax reform, industrial relations reform, education and training, deregulation and increased infrastructure spending”.

“It’s doubtful they will get us anywhere near the post-war real GDP growth rate of 4.4 per cent a year,” he added, pointing to an earlier era that exhibited rapid population and economic growth.

Dr Oliver said a weak inflation outlook and the prospect of much lower immigration, and therefore population growth, would make the higher public debt burden more difficult to defray. “There is no baby boom in prospect and high unemployment will make a quick return to high immigration levels unlikely,” he said.

Dr Oliver was relatively relaxed about the increase in debt, stressing the importance of stimulus in the midst of the first recession in 30 years. “One positive versus the post-war period is that interest rates are even lower, with the government able to borrow for 10 years at 0.86 per cent and three years at 0.25 per cent.”

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