Eye-wateringly bad, yet rosy: why these budget numbers will get worse

The $300 billion hit to government finances is as good as it is going to get.

paper showing lots of numbers

Warren Hogan, University of Technology Sydney

Thursday’s economic statement is the government’s first attempt to quantify the impact of the coronavirus pandemic on government finances and should be treated with caution.

The near $300 billion hit to government finances over two years is, as the treasurer says “eye-watering”, but that forecast is as good as it’s going to get.

In all likelihood the impact of the virus on the economy and government finances will be much worse. The health crisis will most likely take longer than assumed to get on top of and the economic recovery will take more government policy than assumed to get out of.

We should be prepared for much bigger deficits than predicted this financial year and potentially a very large deficit once again in 2021–22.

This is fine. With government debt projected to rise to 45 per cent of GDP over the year ahead, we’ve still plenty of ‘fiscal space’; that is, room for the government to spend more in order to ensure a recovery.

The average debt level across members of the Organisation for Economic Co-operation and Development is 100 per cent of GDP.

Optimistic about both health and the economy
The statement reveals the pandemic knocked $33 billion off budget revenues last financial year and should knock $56 billion off this financial year.

The cost of the emergency measures is even bigger, $58 billion last financial year and $118 billion this financial year. The result is a $90 billion budget deterioration in 2019–20 followed by a $190 billion deterioration in 2020–21, a total of about $300 billion.

That’s the relatively good news. The bad news is these numbers are based on something close to a best-case scenario. If they change, there is very little chance it will be for the better. We would need to see something like a near-immediate discovery of a vaccine and its distribution within months.

The list of things that could go wrong is much longer, chief among them continued outbreaks and lockdowns like the one in Melbourne and worse news from overseas.

Treasury’s assumptions include:

- an end to all domestic restrictions including the four-square-metre rule by the end of the year
- an end to Melbourne’s lockdown after six weeks followed by a staged re-opening
- no reimposed restrictions in other states
- international borders gradually opened from January and fully opened by next July.

Given these assumptions, the short-term economic forecasts are reasonable and not too far out of line with what would be the consensus of economists.

They include a 7 per cent drop in GDP in the three months to June followed by a 1.5 per cent rebound in the three months to September and gradual improvements after that. The unemployment rate is expected to peak at (only) 9.25 per cent within months.

But unemployment typically peaks at about 11 per cent in a recession, and the government itself has said that taking hidden employment into account the rate is probably closer to 13 per cent.

With the virus running riot across the Americas and surging in Africa the downside risks outweigh the others. The treasury forecasts eschew the traditional approach of charting a middle path through upside and downside risks.

But finances aren’t a problem
The update is telling us the pandemic will cost the government about $300 billion over the two years.

The eventual number is likely to be much higher, by 2022 probably closer to half a trillion dollars. It is a perfectly reasonable sum.

Even if the deficits and debt associated with the pandemic end up being twice what the government is projecting our government debt will still be just over 60 per cent of GDP, a level that would be the envy of most other countries, many of which don’t have the potential to grow and recover that Australia does.

For our government, the investment is well worth the money.The Conversation

Warren Hogan, Industry Professor, University of Technology Sydney

This article is republished from The Conversation under a Creative Commons licence. Read the original article.

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    COMMENTS

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    Bakka
    24th Jul 2020
    3:24pm
    These are staggering numbers and the ramifications will not be appreciated by many.
    The Federal Gov. was right to take the swift action is has... however it may have been predicated on a corresponding acceptance by all the population to adhere to covid rules.
    Sadly this was not the case and now we all run the risk of all those billions being wasted and now having to tip in more borrowed funds to stem the tide.. all for the so called " social rights of a selfish few".
    All well and good as current borrowing rates are low. However what if the interest debt servicing blows out to say 8 or 10% in years to come? we may never pay it back ...all due to the actions of some in the winter of 2020.
    Josie4
    24th Jul 2020
    3:26pm
    I wish they would stop banging on about the deficit. We all know it's bad. Not our fault though. It just leads to anxiety in some. The whole world's economy is woeful. Did we ask for it? No. The way they present it, they make you feel that you are largely at fault. It may not have been the brightest time to buy defence equipment for squillions!! Make no mistake, the Govt will claw it back, usually from those who can least afford it. Actually, that is just about everyone at the moment. (Except politicians). Remember those immortal words from our friends Hockey and Korman, " the age of entitlement is over"
    P$cript
    25th Jul 2020
    1:39pm
    The reason you feel anxiety is you has been listening to the rhetoric of the Liberals debt and deficit. While interest rate and inflation is so low the stimulus is not worth worrying about.
    Once the economic growth starts the GDP to debt ratio effectively reduces the debt without actually paying off any of the debt. This is how most of the debt of the WW2 was payed down.
    Buggsie
    24th Jul 2020
    4:02pm
    The government is acting responsibly and that is what we should all expect from our government. Sadly, its not always true and LNP governments have a bad record in managing the country during economic downturns - shades of Hockey. Abbott! As for paying back the accumulating debt, time will take care of this without too much stress, providing careful and caring management of people working to support our economy continues. Without doubt, up to 1000 so called "zombie" businesses will fail in the next 6 to 12 months and unemployment will soar to well beyond 10%. If the numbers are considered to be "eye watering" now, wait and see what they are like after 2 years of economic depression (not recession - we are long past that). We have to solve the health crisis first, and worry about economic recovery second.
    Big Kev
    24th Jul 2020
    4:42pm
    If one listens to modern economists, they propose Modern Monetary Theory which states that National Governments don't have to worry about deficits as they can simply print money, providing they don't create inflationary pressure. Unfortunately this Govt doesn't seem to get it. They are cutting money from welfare recipients who will spend it all thus boosting economy and jobs and are instead bringing payroll tax cuts to big businesses who will hoard money and not boost jobs.

    The other item journalists have missed is that 2/3 of deficit existed prior to COVID 19.
    Incognito
    25th Jul 2020
    1:46am
    Spot on Big Kev, I heard it the other day, we do not have to pay it back ever, just have to be careful they do not create inflation so bad that the dollar drops too far.
    I wish they would stop saying "tax payers money". Taking more money off those less fortunate is not going to help anyone. We have too many people living below the poverty line, we end up with more homelessness, drug addicts, alcoholics, sick people being a burden on the health care system, and less spending which slows the economy down even further.
    Incognito
    25th Jul 2020
    1:47am
    Not too mention crime goes up too.


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