Budget to “dig deep” to support the economy

The ongoing financial impacts associated with the Coronavirus pandemic could force Australia’s underlying cash deficit to run into the hundreds of billions of dollars.

Speaking ahead of next week’s Federal Budget, Commonwealth Bank’s Head of Australian Economics, Gareth Aird, said the Government would likely – based on current estimates – announce an underlying cash deficit of $A220 billion. This marks a $A35 billion increase on the deficit projection included in the July Economic Fiscal Update.

“Back in March the Government took the decision to defer the originally scheduled May 2020/21 Budget to October due to the COVID-19 pandemic. Since then the Australian economy has been through an extraordinary period,” Mr Aird said.

In September, Australia entered its first recession in 29 years, with gross domestic product (GDP) in the June quarter down seven per cent - the largest contraction on record.

Mr Aird said the unique nature of this recession, coupled with the Government’s massive fiscal packages, mean the Commonwealth Budget has been hit hard.  Of course, Australia isn’t an outlier in this regard.

“Big budget deficits are very much the dominant theme around the world right now,” he said.

“The budget balance should look a lot better in 2021/22.  But it will still be deep in the red and won’t resemble anything remotely like the $A8.4 billion surplus projected in the 2019/20 Mid-Year Economic and Fiscal Outlook.

“Clearly we are shooting largely in the dark in forecasting the underlying cash deficit in 2021/22, but we wouldn’t be surprised to see the Government forecast a deficit in the ballpark of $110 billion.”

Deficit aside, Mr Aird said he expects the Government’s Federal Budget to be ‘stimulatory’ with no ‘austerity measures to be introduced over the next few years’.

“The Government has stated that the focus over the near term will be three fold: allowing the automatic stabilisers to work freely to support the economy; providing temporary, proportionate and targeted fiscal support, including through tax measures, to leverage private sector jobs and investment; and pushing ahead with structural reforms,” he said.

Legislated ‘stage two’ tax cuts, which were originally planned for July 2022, are expected to be brought forward.

“The tax cuts are estimated to “cost” around $A15 billion per annum, which is another way of saying the tax cuts would inject $A15 billion into the economy,” Mr Aird said.

“This would result in more spending, economic activity and therefore tax receipts so the true “cost” to the budget is lower.  Pulling forward the tax cuts also makes sense given we will see very little nominal wages growth over the next few years.”

In addition, Mr Aird said he expects the Government to announce greater infrastructure spending and make a decision about the permanent lift to JobSeeker.

“The Government will not shift to restoring the fiscal position until the unemployment rate is comfortably back under 6 per cent,” he said.

“We do not expect the Government to forecast an unemployment rate below 6 per cent until 2022/23.”

To find out more, listen the Federal Budget and RBA preview podcast. 

Source: Commonwealth Bank of Australia, Global Economic & Markets Research report “CBA Economics: 2020/21 Budget Preview”, published 29 September 2020, author Gareth Aird.

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