$1.1 trillion plunge into debt, deficit at $250bn

The nation’s official debt ceiling will be lifted beyond $1.1 trillion, with Tuesday’s budget set to also record a ballooning peak deficit.

Scott Morrison will unveil a further $7.5bn in infrastructure funding on Monday. Picture: Gary Ramage

The nation’s official debt ceiling will be lifted beyond $1.1 trillion, with Tuesday’s crisis budget set to also record a ballooning peak deficit for this year of just over $210bn.

The new debt cap, to be contained in the budget papers, would take the gross debt to GDP ratio to about 55 per cent — the highest level since the 1950s but remaining among the lowest debt levels of developed countries.

The 2020-21 budget deficit will peak at a little over $210bn before coming down over the following three years as the government moves to dramatically expand its borrowing capacity to help underwrite the post COVID-19 economic recovery.

The deficit will be used to fuel a demand-driven agenda, with the budget poised to deliver a multi-billion-dollar wage subsidy for businesses to employ new workers — in addition to the JobKeeper program — and accelerated income tax cuts to drive household spending.

Scott Morrison will on Monday also unveil a further $7.5bn in infrastructure funding that will be brought forward to this year’s budget and allocated for shovel-ready national transport projects aimed at supporting 30,000 direct and indirect jobs.

The budget measure will bring the total COVID-19 related commonwealth investment in infrastructure to almost $19bn as brought-forward funding from the existing $110bn, 10-year infrastructure plan.

The government has already flagged tax incentives for investments, continued tax breaks for small businesses and announced key budget measures, including the expansion of the first-home buyers’ deposit scheme and the $1.5bn manufacturing plan.

On Sunday, it announced a $1.2bn wage subsidy scheme for apprentices where 50 per cent of wages for new trainees would be subsidised.

Josh Frydenberg, who has all but confirmed bringing forward billions of dollars in planned future income tax cuts in Tuesday’s budget, flagged in July that the government would have to revisit the debt ceiling, which had then been expected to exceed the $850bn cap imposed in February.

The debt ceiling, first legislated in 2007 and set at $75bn, was gradually lifted throughout the Labor government’s term in response to the global financial crisis, reaching $300bn by 2013 when the Coalition took office.

In 2014, the legislation was scrapped and replaced with an administrative mechanism to revise the ceiling as needed.

Partner at Deloitte Access Economic Chris Richardson said “the big number of the budget night” will be the debt figure and it was a necessary evil in a time of crisis.

“There will be references to international debt comparisons and so there should be. They will be low by comparison,” he said.

“Yes, debt is no fun ... but what is the alternative? When everyone is yelling about increases in debt … I will argue that interest rates will be lower in the next few years than they have been in the past few years.”

“We would be cutting off our nose to spite our face to race towards balancing the budget.

“At any other time I’d be grumpy about this. Today, I’m cheerful about it … You have to fight recessions as hard as you can because the aftermath can go on for a decade.”

Deloitte Access Economics will also release modelling of population forecasts that could have perilous longer-term impacts for the economy.

It will warn that the revised forecast would see Australia shrink by 600,000 people by mid-2022, due largely to net overseas migration entering negative territory for the first time since 1946

“The budget numbers will update us but our forecast is that the borders being closed for longer will drive a deeper cut into population,” Mr Richardson said.

“Australia’s economy is not just an economy used to drive higher population growth ... the shape of our industry structure is geared to a high population-rich nation.

“This is pulling people power out of the economy, and is going to have all sorts of implications.”

The Treasurer on Sunday confirmed the budget’s forecasts would be predicated on the development of a coronavirus vaccine next year.

Treasury forecasts have changed all year as different pandemic events dramatically shifted economic outcomes.

Mr Frydenberg told Sky News the government was working hard on securing a vaccine and it was a factor in his budget considerations. “We have factored in those issues related to the vaccine and those will be available on budget night,” he said.

“We have worked hard with international counterparts to secure the vaccine for Australia. The budget takes into account the possibility that (the development of a vaccine next year) is the case.”

The Prime Minister said Tuesday’s budget, which had been pushed from May to October 6 in response to the pandemic, would deliver on the government’s JobMaker plan with the bringing forward of infrastructure spending.

“We have been working closely with state and territory governments to invest in the infrastructure that is ready to go and can help rebuild our economy and create more jobs,” Mr Morrison said.

“These projects will keep commuters safe on the road, get people home to their loved ones sooner and provide better transport links for urban and regional communities.

“As part of the COVID-19 economic recovery plan, we have invested an additional $11.3bn focused on shovel-ready projects across the country.

“This investment through Tuesday’s budget will boost the national economy and support an estimated 30,000 direct and indirect jobs across the nation.”

Finance Minister Mathias Cormann has also called on the states to do more to boost the post-pandemic economic recovery, as Western Australia gets set to deliver a budget surplus in spite of warnings by the central bank that the states needed to spend an extra $40bn in pandemic stimulus.

Senator Cormann said on Sunday he wanted all states to contribute more, including WA.

“I would say states around Australia, including my home state of Western Australia, could do more to support Australians, to support business, to support jobs … and to ensure that we pull together and maximise the strength of the economic and jobs recover,” he said.