The attached note takes a look at the coming surge in Australia’s budget deficit and public debt. The key points are as follows:
- Australia’s federal budget deficit is expected to peak at around $200bn in 2020-21, or around 10% of GDP which will be the highest since the end of WW2.
- This will see net public debt nearly double as a percentage of GDP over the next few years.
- However, the budget stimulus is necessary to avoid an even worse outcome, public debt is relatively low in Australia, the budget support programs will phase down when no longer needed and government borrowing costs are very low. So, the deficit and debt increases are affordable.
- Productivity enhancing economic reforms provide the best approach to help the economy grow and get debt levels back down and this is likely to be the focus in the October Budget.
Last night would have been Budget night and the Australian Treasurer would have been announcing budget surpluses. Of course, coronavirus intervened, and the surpluses rightly had to be sacrificed to support Australian households, businesses and jobs. And it makes no sense to provide detailed budget forecasts given the extreme uncertainty about the impact on the economy and hence the budget for the coronavirus shutdown. So, the Treasurer has provided a statement to Parliament on the economic impact of the crisis, updated budget numbers will be provided in June and the Budget itself has been delayed to October.
As the economic impact of the crisis is well known I won’t go through that again here except to note two things from the Treasurer’s statement. First, more than 5.5 million Australian workers are now covered by the JobKeeper wage subsidy program which is coming close to the Government’s initial estimate that it would cover 6 million. Second, the Treasurer reiterated that the best way to pay back debt is through productivity enhancing reforms focussed on workforce training and education, infrastructure, cutting red tape, taxation and industrial relations reform. So, reform to help the economy recover post coronavirus will likely be the key focus in the October Budget.
This note looks at our own projections for the budget deficit, the impact on Australia’s net public debt and whether it’s affordable.
Budget deficit projections
The next table shows our rough budget deficit projections, taking the Mid-Year Economic and Fiscal Outlook projections from last December as the starting point.
Source: Australian Treasury, AMP Capital
Under “policy changes” we have allowed for the three policy support packages announced through March, the health package announced in March, various industry support packages including that for childcare and bushfire spending. These are dominated by the $130bn JobKeeper program and are concentrated in this financial year and next, particularly for the period out to September. While the reopening of the economy may be coming a bit earlier than the Government had allowed for, we assume that the Government redirects some of the JobKeeper program from those who may no longer need it, to those who do, such that the full $130bn is still spent. In total and allowing for state fiscal stimulus this is resulting in a 10.6% of GDP fiscal stimulus for this calendar year, which swamps the stimulus seen in the GFC (and rightly so because the GFC posed a much smaller threat to the economy).