Australia is on track to post a record budget deficit this year, the government admitted today (Tuesday October 6, 2020) while unveiling plans to further open the spigot on pandemic stimulus spending. Government finances are forecast to be more than Aus$200 (US$143) billion in the red, even if a Covid-19 vaccine is found, according to a budget unveiled to parliament.
The conservative government announced it was opening the public chequebook through billions in tax cuts, in a bid to support a virus-battered economy, suffering its first recession in 30 years. A series of income tax cuts will be brought forward and backdated, businesses will get billions in new tax breaks, and the government will continue paying employers not to let staff go. A deficit of Aus$213.7 billion is expected this year around 11 percent of GDP.
Overall gross debt will rise to over one trillion dollars, or around half of the country’s GDP, by 2024 — versus roughly a quarter in this year. “This is a heavy burden, but a necessary one to responsibly deal with the greatest challenge of our time,” said Treasurer Josh Frydenberg. Australia has fared better than most during the pandemic — both in terms of health and economics — with community transmission at low levels and the economy contracting a relatively modest seven percent in the June quarter.
But another lockdown in Melbourne has raised fears that recovery may be slow and spluttering. “It’s been clear that the pandemic has been a huge blow to the household sector, with massive job losses that points to the unemployment rate rising to around 10 percent,” said NAB economist Kaixin Owyong. The Reserve Bank of Australia warned that recovery would likely be uneven and would take time to return to levels seen at 2019’s end.
“Unemployment and underemployment are likely to remain high for an extended period,” Governor Philip Lowe said Tuesday. The central bank kept interest rates at a record low of 0.25 per cent but indicated it would “consider how additional monetary easing could support jobs as the economy opens up further.”
Tuesday’s budget comes less than a year after Prime Minister Scott Morrison claimed public finances were “back in black” pretending this year’s surplus was a done deal and making that a central pillar of his successful election campaign. Despite fears about saddling future generations with debt or paving the way for years of austerity, supporters say lavish spending is necessary to stave off a more severe downturn that would cost more jobs and plunge millions into poverty. They also point out that debt is manageable, with interest rates on ten-year government bonds currently at around one percent.
