COVID to leave Australia with smaller economy and older population

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Michelle Grattan, University of Canberra

Josh Frydenberg has painted a sombre picture of the outlook for the Australian economy, saying that by mid next year it is set to be 6 per cent smaller than forecast at the end of last year.

The treasurer also warned wages growth will be subdued for years, in a Thursday speech setting the scene for the 6 October budget.

While reaffirming that the government’s temporary COVID measures needed to be phased out, in a message designed to reassure Mr Frydenberg indicated the government’s focus would be economic recovery rather than budget repair until unemployment was back “comfortably” under 6 per cent.

“Only through repairing the economy can we repair the budget,” he said.

Mr Frydenberg said the pandemic would have long-lasting effects on the economy and the budget.

“Our economy will be persistently smaller as a result of the pandemic than forecast in the 2019–20 MYEFO [December budget update], both in real and nominal terms.

“In the near term, real GDP is forecast to grow strongly, but this growth will come off a lower base.

“By the end of 2020–21, Australia’s real economy is expected to be around 6 per cent smaller than forecast in the 2019–20 MYEFO,” he said.

The recession put pressure on three key drivers of growth – population, participation and productivity, Mr Frydenberg said.

“Australia’s future population will be smaller, and older, than we previously assumed because of the sharp drop we are seeing in net overseas migration,” he said.

Population growth was expected to slow to its lowest rate in more than a century.

The budget was expected to show net migration outflows were now likely in both 2020–21 and 2021–22.

“While migration will eventually return to the levels we are accustomed to, lost migrants will not be replaced.

“And given our migrant workers tend, on average, to be younger, this will lower labour force participation and average hours worked across the economy into the future.”

As with past recessions, here and abroad, the unemployment rate would take time to return to pre-crisis levels. “This economic scarring, together with lower levels of business investment, is likely to dampen participation and productivity – the other two key elements of potential growth,” Mr Frydenberg said.

“The other key change in our economy, will be a persistently lower level of prices and wages.

“With high levels of spare capacity in the economy, it will be some time before inflation returns to the mid-point of the Reserve Bank’s target range.

“And wages growth is also likely to remain subdued for at least the next few years, until the jobs market tightens,” Mr Frydenberg said.

The changes to the economy would weaken the medium-term budget position, despite targeted support being phased out.

“A smaller economy, with lower price and wage growth, will generate less income for the government over the medium term.

“Income taxes will grow more slowly, reflecting a smaller wages bill.

“Corporate taxes will also grow more slowly, reflecting lower profits and economic activity.”

Mr Frydenberg said that in the near term, government payments would spike, from the big temporary support.

“Over the medium term, the level of payments, in dollars, is likely to remain broadly comparable to our estimates at MYEFO, once our temporary fiscal support has finished.

“However, this level of payments will represent a larger share of a smaller economy.

“By the end of the medium-term period, payments are still expected to be materially higher than pre-COVID levels as a share of GDP.

“So … the changes to our economy that flow from this COVID recession will have a lasting impact on our budget position, even as our targeted policy support is unwound.

“Lower tax receipts and higher spending as a share of the economy will impact our fiscal position for many years to come. Even as the economy recovers.

“This is the nature of this unprecedented COVID-19 recession.”

Mr Frydenberg said the budget would recalibrate the fiscal strategy to reflect the new circumstances.

There would be two phases.

The first phase, focused on boosting business and consumer confidence and boosting jobs and growth, would have three elements.

“First, we will continue to allow the automatic stabilisers to work freely to support the economy.

“Second, we will continue to provide temporary, proportionate and targeted fiscal support, including through tax measures, to leverage private sector jobs and investment.

“Third, we will continue to push ahead with structural reforms that position the economy for the jobs of the future and which improve the ease of doing business.

“The first phase of our strategy will remain in place until unemployment is on a clear path back to pre-crisis levels” – comfortably under 6 per cent.

Phase two, focused on restoring the fiscal position, would also have three elements.

“First, we will maintain our central focus on jobs and growth, combined with structural reforms that increase our economy’s potential.

“Second, there will be a deliberate shift from providing temporary and targeted support for the economy to stabilising gross and net debt as a share of the economy.

“Our 23.9 per cent cap on the tax to GDP ratio will be retained.

“Third, we will start the hard work of rebuilding our fiscal buffers, so that we can be prepared for the next economic shock,” Mr Frydenberg said.

“Our revised fiscal strategy is consistent with our core values. These have not changed.

“It will maintain our emphasis on fiscal discipline, lower taxes, containing the size of government and investing in a strong economy.

“But as we should, we will place greater weight on supporting the economic recovery in the near term and on economic reforms that lift potential growth in the medium term.”The Conversation

Michelle Grattan, Professorial Fellow, University of Canberra

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

How do you expect Australia to emerge in a post-COVID world? What do you think should be done to get the economy growing again?

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Written by The Conversation

16 Comments

Total Comments: 16
  1. 0
    0

    “ONly through repairing the economy, can we repair the budget” says the Treasurer. So, if we can repair the economy without fixing the budget why do we stress so much about the deficit?

  2. 0
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    Frydenberg is a scare mongerer preparing the ground for excuses for Liberal party incompetences, and further attacks on pensioners.
    Given the Covid is decimating ‘the older population’, how does that moron come up with the concept that we’ll end up top heavy with oldies????? He’s getting ready to hit up Superanuations, Increase or introduce a high tax on inheritances, Reduce age pensions and a whole lot of other things to target the oldies.

    • 0
      0

      Seems sensible to cut spending just in case. Personally staying home saves a lot of money. I’ll be using it to save for future care needs myself.

      I’ve never been given a pension or much help at all. I’m planning on transferring assets to a trust to protect them from the Government needing to support those who won’t stop blowing money on unnecessary entertainment and those too lazy to even shop and cook for themselves.

      Planning how to stop theft of your savings is needed now.

  3. 0
    0

    The only real impediment to the continued growth of the Australian economy is the lack of vision apparent in our so called leaders. Where are the men and women who have the vision, courage, vitality and selfless devotion to the common good so necessary to lead us forward. The only thing that a leader can learn from the past is never to repeat it – why then are we still focusing on carbon fuels instead of renewables? Why are we still selling our irreplaceable natural resources to others to exploit for their own benefit? Why are we so unwilling to develop self sufficiency through encouraging the growth of manufacturing in Australia? Looking forward long term is not something that our current crop of pollies in Canberra is very good at – the guiding principle seems to be “if it doesn’t help us to get reelected its not worth doing” I suppose once a polly is on the gravy train – large salaries, tax free allowances, subsidised accommodation and meals – why would they do anything, no matter how important to our future welfare, that would jeapodise thier chance of reelection.

    • 0
      0

      COVID has handed the politicians the perfect wave to continue the rot they signed with the Lima Agreement. Make Australia poorer, transfer jobs to poorer nations so companies can make more profit, force Australians to buy more of what we use from other countries and drive down wages. Along the way they approved selling key assets to foreign nations, approved States taking on ridiculous debt and give away our sovereignty. Oh yeah, and invest in the winners so they are not penalized for their traitorous stands against the nation.

  4. 0
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    No mention of government investment in manufacturing to ensure economic independence in the future. What this country needs is jobs for the unemployed and self sufficiency in food, clothing and transport. Ideal way to stimulate the economy and at the same time eliminate reliance on other countries. The more people in work the more revenue for the government to build infrastructure – I would have thought “experts” would have worked that out.

    • 0
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      Economists have strange theories these days and all the decision makers have been schooled in those theories and not taught economic history.

      So they believe 6% unemployment is needed to stagnate wages. That GDP is God even though foolish policy allows 25% of GDP to be taken overseas every year.

      You think about that. We are getting poorer and poorer year after year and yet the maths and the theories say it’s the way to grow the economy.

      It will take a full blown recession for these young people to experience what can go wrong.

  5. 0
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    Good point Buggsie,why the heck are we using fossil fuels with the technology in solar and massive battery storage,if the Yanks can settle in Alice Springs with their program,why can’t we build solar farms like no one has ever seen,we have the technology..land…sun,and now a labor force that can be trained to install with massive flow on openings,they are still prattling on about coal,perhaps that’s why the pollies like coal,it comes from dinosaurs and dead wood…enjoy your weekend

  6. 0
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    The LNP should reimburse the money they stole from part pensioners with the changes in 2017 to the Pensioner Assets Test. That would get the economy moving.

  7. 0
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    I welcome a smaller economy and a move to a more sustainable and sane society. Immigration has been too high for too long and gave Australians the illusion of a growing economy which is assumed is what we all want. In fact the real productive part of the economy has been shrinking for a long time, and growth was mainly in government services and spending plus housing for the new migrants. This has also driven our unsustainable high house prices and rental shortages. Thanks to covid virus we’ll finally be seeing some balance coming back. Unsustainable growth is like a cancer which has damaged our planet as a whole. The virus has given many of us time to reassess what’s really important in life, and health is on the top of my list. These are for me the positives coming out of this crisis.

  8. 0
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    25 billionaires have increased their wealth by $255 billion so far during the pandemic, so is it everyone who is suffering a recession in the world? No, just make the hard workers earn less and struggle more, making the gap bigger between rich and poor.

  9. 0
    0

    Just pay people decent wages — they will spend it!

    Also, allow pensions to get the rises they should have got –they will also spend a bit — start manufacturing stuff here, and we can EXPORT it — instead of paying out BILLIONS for ship/subs/planes — built in other places that are out of date when we ordered them.

    Even the new Ice Breaker ship, built O/S, trains and ferries built O/S and won’t fit under our bridges — what an utter waste of money!!!!!!!!

    it is a darn disgrace and shows this Government has NFI

  10. 0
    0

    It’s not going to happen. 1.8% fertility rate is pretty large from a 26 million starting point and will ensure plenty of little vegetates.
    The exponential equation only needs a teeny % to end up with very high numbers.


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