Covid-19 outbreak ‘a $40bn body blow for budget’

The devastating hit from Delta lockdowns alongside billions spent to support workers and businesses through the disruptions could blow a $40bn hole in the federal budget.

Lost taxes and higher spending as Delta lockdowns ravage the economy will drive the deficit wider in 2021-22. Picture: Andrew Henshaw

The devastating hit from Delta lockdowns alongside billions spent to support workers and businesses through the disruptions could blow a $40bn hole in the federal budget.

Deloitte Access Economics partner Chris Richardson projected the federal deficit would widen by $41bn in 2021-22 to nearly $150bn, based on Treasury’s forecast for a $107bn underlying cash deficit in the May budget.

Mr Richardson said of that $41bn hit, $28bn was accounted for by additional spending, with about $13bn reflecting the loss of revenue and higher welfare payments as lockdowns ravaged economic activity through the September quarter and beyond.

Cumulative deficits will be about $54bn larger over the three years to 2023-24, he said.

Mr Richardson noted, however, that while the deficit may blow out by tens of billions, the cost of servicing the additional debt would be negligible thanks to low borrowing rates.

ANZ economist Hayden Dimes estimated the 2021-22 federal deficit would widen by about $30bn, taking it to between $130bn and $140bn.

Mr Dimes said he expected an additional $15bn in fiscal support to offset the impact of lockdowns which would stretch “well into” the December quarter, alongside up to an extra $5bn in fiscal measures in the mid-year budget handed down towards the end of this year.

“Critically, for these estimates we assume that NSW is largely in lockdown until mid-to-late ­November, while in Victoria it is assumed the current lockdown lasts to the end of September, and then eases only slowly,” he said.

The commonwealth has ­already provided $4.2bn in income support to more than 1.7 million workers via its Covid disaster relief payment, according to the Department of Health. Of that, $3bn has been paid to NSW workers, $713m to Victorians, and $243m to Queenslanders who have lost hours as a result of lockdowns.

Business support via the JobSaver program was expected to cost $500m a week and by last week $1.6bn had been paid in NSW – with the commonwealth splitting the cost with the states.

Based on these numbers, Mr Dimes estimated the federal government would eventually outlay $10bn-15bn on these two programs, with an additional $2bn-$3bn in one-off business grants and a further $400m in support for the childcare sector.

The 2021-22 deficit could even prove to be the largest ever, Mr Dimes said, if the $161bn forecast deficit for 2020-21 came in substantially under the May budget forecast. The most recent Department of Finance figures showed a $15bn improvement over the ­financial year to June.

“We think the government will likely take into consideration how the deficit for 2021-22 is tracking relative to 2020-21 when it decides on the amount of ­additional spending at MYEFO (the mid-year economic and fiscal outlook),” Mr Dimes said.

Mr Richardson said the level of fiscal stimulus during Delta was well below that extended during 2020, but that “the ­rebound in the economy is arguably now more linked to vaccinations than to government support”.