Budget 2020: Covid’s $589bn lingering pain

The COVID-19 recession will blow a $589bn hole in the government’s finances over the five years to 2023-24, with the deficit peaking at $214bn in this financial year.

Josh Frydenberg, Scott Morrison and Michael McCormack, right, in Parliament House in Canberra on Tuesday. Picture: Getty Images

The COVID-19 recession will blow a $589bn hole in the government’s finances over the five years to 2023-24, with the deficit peaking at $214bn in this financial year as the budget unveiled rolling debts and deficits out to the limit of its 10-year forecast horizon.

Finance Minister Mathias Cormann said “our economic response to COVID-19 has come at a significant cost”.

The small surpluses envisaged in the mid-year budget update in December last year have been transformed into deficits of tens of billions of dollars, peaking at $213.7bn this financial year, or 11 per cent of GDP, as the health crisis smashed tax receipts and sparked stimulus spending on an unprecedented scale.

The underlying cash deficit will narrow to $66.9bn, or 3 per cent of GDP, in 2023-24, and will still be at 1.6 per cent of national output by 2030-31.

The largest deficits since WWII will be matched with the highest debt levels in more than 60 years, as the government embarks on a borrowing spree to pay for the extra spending, even as the recession smashes tax receipts, the budget papers revealed.

Gross debt will surge to $872bn, or 45 per cent of GDP, by the end of this financial year, and balloon to more than $1.1 trillion by mid-2024, or 52 per cent of GDP – twice the level envisaged before the pandemic – before stabilising at 55 per cent of national output by the start of the next decade. Net debt will reach $703.2bn by the middle of 2021, or 36.1 per cent of GDP, and peak at $966.2bn, or 43.8 per cent of national output, by June 2024.

“This is a heavy burden, but a necessary one to responsibly deal with the greatest challenge of our time,” Josh Frydenberg said. “By comparison, Australia’s net debt as a share of the economy will peak at half of that in the United Kingdom, around a third of that in the United States and around a quarter of that in Japan today.”

Historically low interest rates, however, mean that while gross debt estimates have soared, the government’s interest expenses as a proportion of GDP will be only 0.1 per cent higher in 2020-21, or around 1 per cent of GDP – well below the peak of more than 5 per cent in the high-interest-rate environment of the 1980s when debt levels were much lower.

The Morrison government has committed to a total of $257bn in direct economic support, equivalent to 13 per cent of national output. Total government payments will be $166.9bn higher in 2020-21 than estimated in the pre-COVID budget update in December 2019, and by $237bn over the forward estimates.

Payments as a share of GDP will surge to 34.8 per cent in 2020-21 – against the 24.8 per cent MYEFO estimate – before tailing off of to 26.9 per cent by 2023-24 as major support measures, such as JobKeeper and the JobSeeker supplement, wind down and the economy improves.

Tax receipts are expected to be $55.2bn lower in 2020-21 than forecast in the December update, and will be down by $283.5bn over the forward estimates.