Australian Budget Is $45 Billion Better, but Long Term Pain Expected: Deloitte

People gather at the Opera Bar as hospitality reopens in Sydney, Australia, on Oct. 16, 2021. (Brook Mitchell/Getty Images)

According to forecasts by Deloitte Access Economics, the budget deficit within the next four years will be $45 billion (US$33.4 billion) less compared to Treasury forecasts, but the long-term outlook for the budget is $60 billion (US$44 billion) worse.

Deloitte partner Chris Richardson said Australian taxpayers would get $45 billion back in their pockets because of the sound pre-Delta economy and tighter budget used to handle the Delta outbreak.

“We’ve said for some time that, if our economy gets better, our budget will too,” Richardson said. “So, it’s no surprise that our red hot recovery prior to the Delta outbreak saw the deficit shrink from a record $204 billion in the year to February 2021, to $101 billion in the year to August 2021.”

The May budget revealed that revenue during the last financial year exceeded official estimates by $20 billion.

The cost of the Delta outbreak was also lower than last year, with the federal government requiring states to take up a more significant portion of the burden.

Treasurer Josh Frydenberg said this report indicated that the federal economic plan was working.

“Our economic plan is working,” Frydenberg told AAP. “Lower taxes and investment in skills and infrastructure will continue to support the economy as we recover from the biggest economic shock since the Great Depression.”

Federal treasurer Josh Frydenberg prior to his budget address at the National Press Club in Canberra, Australia, on Oct. 7, 2020.
(Sam Mooy/Getty Images)

Despite the mounting level of debt, Richardson noted that the cost of debt actually went down due to lower interest rates.

“Debt went up, but interest rates went down—and the latter gives a double benefit, applying not just to the new debt, but also to rollovers of existing debt,” he said. “And the net impact? We forecast net interest payments in 2024-25 to be $30 million lower than Treasury estimated in the budget.”

However, the issue lies in the long-term, where a $60 billion budget hole is expected to open. This is approximately equivalent to if the Australian defence forces were disbanded in addition to cutting federal spending by half.

“COVID-19 costs are temporary costs, whereas the real risk to budgets always lies with permanent cost shifts,” Richardson said. “Sadly, while we were looking elsewhere, life got more costly.”

Deloitte also said Australia needed to “catch up” in social spending, with more costs expected in aged care, disability, and mental health. For example, there is a ballooning gap between forecasts and actual costs for the National Disability Insurance Scheme.

Defence spending is also expected to increase, as budget estimates do not include costs like the new nuclear submarine deal.

Australia is also far behind pre-COVID-19 labour forecasts due to the closure of international borders for nearly 600 days.

“To be clear, that’s not a $60 billion hole we should try to fill fast; doing so would hurt a still fragile economy far too much,” Richardson said. “But there’s a federal election looming, and we shouldn’t let either side go through that campaign pretending there aren’t difficult decisions to make down the track.”