In review: Australia July Economic and Fiscal Update
The Federal Treasury has today provided its Economic and Fiscal Update ahead of the budget due to be handed down on October 6. Back in December last year, Treasury's Mid-Year Economic and Fiscal Outlook forecast the budget to be on track for surpluses of $5.0bn in 2019/20 and $6.1bn in 2020/21. With the onset of the pandemic driving the nation into recession for the first time since the early 1990s and to its sharpest downturn in the post-war period, the budget outlook has changed drastically with fiscal support being ramped up at full throttle, while the Reserve Bank of Australia also announced a significant package of measures to ease its monetary policy stance in March.
Today's update forecasts budget deficits of $85.8bn in 2019/20 (4.3% of GDP) widening to $184.5bn in 2020/21 (9.7% of GDP). In the 2019/20 financial year, the budget position is impacted by $58.4bn provided in policy support measures and a $32.4bn hit from the economic downturn resulting in tax revenues falling (-$32.6bn). For 2020/21, the broadening in the deficit reflects policy support ramping up by $118.4bn, while the recession costs the budget $72.2bn with revenues down by $56.4bn and payments rising by $15.8bn. As a result, government net debt is projected to rise to $488.2bn (24.6% of GDP) compared to the $392.3bn figure forecast in the 2019/20 MYEFO and then to $677.1bn (35.7% of GDP by June 2021. However, with yields on 10-year Commonwealth government bonds at around 0.9% and well below the nation's economic growth potential, the increase should be manageable.
On the economic outlook, Treasury forecasts domestic real GDP to contract by 0.25% through the 2019/20 financial year, this after the 0.3% decline in the March quarter and a forecast fall of 7% in the June quarter. Over the year to 2020/21, real GDP contracts by 2.5% on weakness across household consumption (-1.25%), dwelling investment (-16%) and business investment (-12.5%). Under this baseline scenario, Treasury assumes that, outside of Victoria, the reopening of the economy progresses in line with the government's three-stage plan, with localised virus outbreaks contained. In Victoria, the current shutdown of Melbourne is projected to remain in place for 6 weeks leading to a mid-September reopening. Meanwhile, the overseas travel ban is assumed to be lifted in the first half of 2021, but with a two-week period of quarantine on arrival into Australia.
A drawn-out recovery is expected in the labour market. The national unemployment rate currently stands at 7.4% as of June and is forecast by Treasury to reach a peak of around 9.25% by the end of this year before easing back to 8.75% at the conclusion of the 2020/21 financial year. While the participation rate is forecast to gradually improve from 64.0% to 64.75% by mid-2021, this would still be well below its pre-pandemic level of around 66%. Meanwhile, employment growth is only seen to improve to a 1% pace through to 2020/21 after contracting by 4.4% in 2019/20.
In terms of policy measures, the key announcements around the extensions of the JobKeeper and enhanced JobSeeker benefits were already made public in the days leading up to today's update. The JobKeeper (wage subsidy) policy has been extended by 6 months through to March 28, 2021. Between September 28 and January 3 (2021), the current flat payment of $1,500 per fortnight reduces to $1,200 for employees working more than 20 hours per week and to $750 for employees working fewer than 20 hours per week. A further reduction then occurs between January 4 and March 28 (2021) to $1,000 and $650 respectively. This extends the estimated cost of the JobKeeper policy from $70bn to $85.7bn over the two years to 2020/21. Meanwhile, the $550 per fortnight enhancement to the JobSeeker support payment has been lowered to $250 from September 25 through to the end of 2020 at a cost of $3.8bn, taking the total to $16.8bn over the 5 years from 2019/20.
Direct Commonwealth fiscal support is now estimated at $164.11bn out to 2023/24, representing around 8.2% of annual GDP, with $111.82bn of this front-loaded into the current financial year.
Link to July 2020 Economic and Fiscal Update here
