Deloitte Access Economics predicts that the pandemic crisis will leave a staggering $370 billion deficit in the federal budget over the next three years as Australia deals with the biggest hit to the Australian economy since the Great Depression.
The report published by Deloitte on May 11 said the high deficit is necessary and should not hold the governments back from spending more to boost employment and championing a new round of economic reform.
The latest Budget Monitor by Deloitte came out just one day before the announcement of an official budget update by Treasurer Josh Frydenberg to Parliament, in lieu of what would normally be the full 2020-21 budget. The official budget has been postponed until October due to the crisis caused by CCP (Chinese Communist Party ) virus, also known as the novel coronavirus.
The report depicts a sobering picture of a slow recovery, a prolonged budget deficit, and yet an optimistic outlook if governments adopt the right policies towards what it called “the recovery marathon.”
$370 Billion Deficit Expected by 2022-23
According to the forecast, the Australian economy will suffer a “hangover from the traumas” of the crisis for years to come. National income is expected to fall short by 10 percent of what the official projections from last December’s mid-year budget in both 2021-22 and 2022-23, with seven percent resulting from the reduction of economic output and three percent attributed to ongoing weakness in price gains.
The unemployment rate is expected to sit at a high level until late 2024.
The higher unemployment and lower income rates will mean a dramatic drop in tax revenue from personal income, down by $14 billion in 2019-2020, and $37 billion in 2020-21 in comparison with official forecasts.
Tax revenue from profit is also set to take a big hit, falling shy of the official forecasts by $8 billion in 2019-20 and $26 billion in 2020-21, with company taxes accounting for most of the pain.
As a result of a deep cut in consumer spending during the lockdown, the same pain is being felt in the revenue from GST, with a shortfall of $6 billion in comparison to official forecasts this financial year and a further $10 billion next.
On the other hand, spending is surging due to policies to support jobs such as Jobkeeper and Jobseeker. The report estimates the actual cost of stimulus policies announced will be around $199 billion.
The significant drop in tax revenue, coupled with a sharp surge in fiscal expenditure, is expected to result in a cash deficit of $143 billion this financial year, $132 billion in 2020-21, $52 billion in 2021-22, and $33 billion in 2022-23.
Prescription for Recovery: “Go Hard, Go Smart”
Despite the hefty deficit figure over the next three years, the report holds that the damage to the budget is temporary, highlighting “the need to let growth in the economy shrink the debt, rather than letting attempts to shrink the debt hold back the economy.”
According to the report’s author, Deloitte partner Chris Richardson, the prescription for recovery is to “go hard and go smart” as “the key problem Australia will face on the other side of this crisis will be unemployment.”
By going hard, governments need to keep spending for a while and accept a further period of higher deficits.
Going smart means it is time for governments to champion a new round of economic reforms in order to “give businesses – big and small – a reason to take bigger bets on the future, unlocking more investment, and with it the potential for more job gains.”
He said Australia’s defence against the CCP virus had been “world-leading,” but the road to economic recovery would be long, with years of “unemployment high, the private sector scared, the Reserve Bank tapped out, and prices for our key exports weak.”
This means “the budget’s fight against the virus has to morph into a fight against unemployment.
“That will need different policies. It means doing more still with federal and state budgets to drive job gains.”
In responding to concerns over competition from migrants for job opportunities, Richard holds that “migrants don’t steal jobs” and keeping borders close won’t help bring the unemployment rate down faster.
“Australia has a strong migration program because it makes sense for us to do so—and it will again on the other side of this crisis. We have what the world wants,” he said.
“Getting young, skilled migrants is a smart play for us. ”