Coronavirus: Economists fear ‘eye-watering’ budget deficit

Josh Frydenberg has warned the country to brace for an ‘eye-­watering’ set of budget figures in Thursday’s economic update.

Treasurer Josh Frydenberg. Picture: Gary Ramage

Josh Frydenberg has warned the country to brace for an “eye-­watering” set of budget figures in Thursday’s economic update, with economists predicting Australia’s deficit could blow out to as much as a quarter of a trillion dollars this financial year.

Stimulus spending to cushion the effects of the COVID-19 recession will turn what had expected to be a balanced budget into one that will stretch well beyond 10 per cent of GDP — what the Treasurer has noted will be a post-war record deficit.

Forecasts by economists at the big four banks, as well as from UBS, Citi and Nomura, surveyed by The Australian on Wednesday, showed a median prediction for a $210bn budget deficit this financial year.

The estimates ranged from Nomura’s $170bn to ANZ’s $250bn deficit forecast.

Whatever the final figures, the Treasurer, who will present fiscal estimates for 2019-20 and 2020-21 on Thursday, told Sky News they will be “eye-watering numbers ­because the budget bottom line has really been hit by the coronavirus”.

The government has committed to $164bn in direct fiscal stimulus and a further $125bn in balance sheet support, with 99 per cent of the total spending contained to this and the last financial years.

The government on Wednesday night released early budget estimates showing the surge in government spending has been accompanied by a collapse in revenue as the recession led to a sharp decline in economic activity.

Company tax receipts are set to plunge by more than $25bn, or 27 per cent, over the two fiscal years, from $93.7bn in 2018-19 to a forecast $68.4bn in 2020-21.

“They are very big numbers … the reality is on the payment side we’ve had a big hit as more people have got this income support from the government,” Mr Frydenberg said.

“But also, on the revenue side, we’ve seen a big fall as businesses are not making the profits they were and people are not in jobs like they were and therefore not paying as much tax.”

He said the government had been “on track” to a budget surplus. “We had brought spending under control, the economy was continuing to grow and then we were hit with this once-in-a-­century pandemic,” he said.

Moody’s lead country analyst Martin Petch indicated that the global ratings agency was prepared to look through the spike in debt and deficits through the COVID-19 recession.

Mr Petch said he remained confident the political and ­social consensus towards paying down debt and the country’s history of prudent financial ­management meant the dramatic worsening in the country’s ­fiscal position would be short-lived.

But he warned that previous episodes of budget repair — ­following the 1990s recession and the global financial crisis — had been made easier by periods of ­robust economic growth.

In contrast, the post-COVID economic recovery may prove more uneven, especially absent a vaccine, with consumers and businesses likely to remain cautious for a long time.

“Our expectation is that the consolidation process will be more prolonged than it would have been in the past,” Mr Petch said.

ANZ forecasts that commonwealth government debt will jump to about $880bn by June next year, or 45 per cent of GDP.

Australia’s state debt burden has also surged, by $53bn in just six months, new analysis by Moody’s showed, as state leaders joined the commonwealth in committing to massive spending initiatives to soften the economic blow from the COVID-19 crisis.

NSW and Victoria are responsible for about 70 per cent of the increased debt in 2020.

The report said that while the states had the capacity to absorb the impact, the sharp rise in debt would limit their ability to respond to the next crisis if left ­unaddressed.