Back to black for budget ‘plausible’ by 2025

Australia’s historic COVID downturn has been followed with an equally historic rapid recovery that could wipe out the largest peacetime budget deficit as soon as the middle of the decade.

Treasurer Josh Frydenberg could be in the position to forecast a balanced budget by the middle of the decade on May 11. Picture: Gary Ramage

Australia’s historic COVID downturn has been followed with an equally historic rapid recovery that could wipe out the largest peacetime budget deficit as soon as the middle of the decade, according to new estimates.

Record Australian dollar iron ore prices, a V-shaped labour market recovery that has pushed employment above pre-pandemic levels, and surging business profits all point to a $200bn improvement to the budget over the forward estimates, UBS chief economist George Tharenou said. “It’s plausible that you return to a balanced budget at the end of the forecast profile,” in 2024-25, he told The Australian.

 

Mr Tharenou said the fact the employment-to-population ratio had already recovered to near historic levels was the key to his non-consensus forecast, as it implied markedly lower outlays on welfare and higher income tax revenue. “Normally what happens in a recession is the labour market takes many years to recover – as long as five-plus years. This time around it’s been several months.”

UBS is the second of the major investment banks to see the potential for a balanced federal budget in the medium term.

Deutsche Bank chief economist Philip Odonaghoe said a “best-case scenario” had the deficit eliminated by 2025-26, or just beyond forward estimates.

He pointed to similar dynamics driving his forecast – an economic recovery that had “well and truly outdone what anyone in the government would have thought we’d get”, arguing it was a downturn triggered by government action, rather than a banking crisis or a major bust.

ANZ on Monday released new estimates that the deficit would shrink to $10bn by 2024-25.

The optimistic forecasts presuppose no major new structural spending commitments in this and coming budgets — an assumption that already looks tenuous with speculation Josh Frydenberg could announce major new initiatives around aged care, childcare and potentially parental leave on May 11.