The Mid-Year Economic and Fiscal Outlook (MYEFO) update to the Australian Federal Budget for 2020/21 was presented by the Treasurer today. The key dynamics are that momentum in the domestic economy since the reopening from its covid-19 shutdown has been stronger than initially expected, helped by the containment of the virus and eased restrictions, while key commodity prices have run well ahead of estimates. These factors have combined to improve the budget position by $23.9bn over the forward estimates, with the deficit for the current financial year expected to come in at 9.9% of GDP, revised down from 11% previously.
MYEFO 2020/21 | Budget Position
The forecast for the budget deficit in 2020/21 has narrowed to $197.7bn (-9.9% of GDP) from $213.7bn (-11.0% of GDP) estimated when the Federal Budget was handed down in early October, with an improved economic outlook driving the revision. Thereafter, the profile of the deficit has lowered to $108.5bn in 2021/22 ($112.0bn previously) and $84.4bn in 2022/23 ($87.9bn), with the projection for the deficit in 2023/24 little changed at around $66bn from $66.9bn. In total, the outlook for the budget position has improved by $23.9bn over the 4 year period of the forward estimates out to 2023/24.
For 2020/21, the $15.9bn upgrade to the forecast deficit to $197.7bn reflects the impact of improved economic conditions, with the effect of parameter changes giving a $21bn boost to the budget through factors including a lower take-up of the JobKeeper policy and higher tax receipts. New policy announcements since the October budget are modest at $4.9bn. This centres on a 3-month extension to the Coronavirus Supplement from January 1 to March 31 2021 at a cost of $3.2bn. Income support recipients (including JobSeeker) will receive a $150 payment per fortnight over the period under the announcement. Meanwhile, an additional $1.5bn has been allocated to accessing covid-19 vaccines ($0.7bn in 2020/21 and $0.9bn in 2021/22).
Across the entire forward estimates period, an upgraded economic outlook adds around $36bn to the budget, driven by a higher tax-take with receipts rising by $22bn, while new policy measures cost $12.1bn - the net result equating to the $23.9bn improvement to the budget position. The profile for government net debt has been revised to a lower trajectory at 34.5% of GDP in 2020/21 (from 36.1%) to 43% in 2023/24 (from 43.8%).
MYEFO 2020/21 | Economic Forecasts
A stronger and earlier rebound in economic activity since the national reopening underpins Treasury's revised set of forecasts. The key is the improvement to near-term momentum following the 3.3% rebound in GDP reported in the September quarter. Real GDP growth for 2020/21 has been upgraded to 0.75% from a 1.5% contraction assumed in the Federal Budget. With more activity coming through earlier than previously expected, the projection for 2021/22 was lowered to 3.5% from 4.75%, while the forecasts for 2022/23 (2.5%) and 2023/24 (2.75%) were both lowered by 0.25ppt. On this outlook, real GDP is forecast to be restored to its pre-pandemic level by Q2 2021.
The stronger GDP growth profile has resulted in a more constructive view on employment growth near term, revised up to 4.0% from 2.75% in 2020/21. But the unemployment rate is still forecast to hold at 7.25% in the current financial year, before moving to a lower profile than assumed in the Federal Budget, falling to 5.25% by the end of 2023/24. Meanwhile, the outlook for wages growth remains subdued and was revised lower to 1.25% in 2021/22.
Despite the recent surge in global commodities prices, partly attributable to an improvement in global growth (see below), Treasury anticipates these elevated levels will retrace such that it elected to retain its forecast for iron ore at US$55/t, albeit with the timing pushed back by 3 months to Q3 2021. The effect of the surge in iron ore prices was reflected in the upgrade in the forecast for nominal GDP growth to 1.0% from -1.75% in 2020/21, though with prices then unwinding the outlook for 2021/22 was downgraded to 1.25% from 3.25% previously.
MYEFO 2020/21 | Summary
The recovery in the Australian economy is well underway with activity rebounding at a faster pace than previously expected. Reflecting these developments, the budget has been updated to reflect this improving outlook. New initiatives in today's update added modestly to the Australian Government's fiscal response to the pandemic crisis, with total policy support standing at $164.7bn in the current financial year.
