Australia’s budget deficit could hit $100B as virus recession risk grows

Analysts suggest that if the slowdown in Chinese students and visitors is prolonged, it could cost Australia’s economy US$543 million over the next two years. Photo: Handout. Sketched by the Pan Pacific Agency.

CANBERRA, Mar 18, 2020, The Sydney Morning Herald. The federal budget deficit could hit a record high $100 billion and public debt approach $1 trillion as the government lifts spending to fight a “coronavirus recession” while its revenue sources collapse and costs go up, The Sydney Morning Herald reported.

Ahead of the government’s second multibillion-dollar stimulus package and a string of measures from the Reserve Bank aimed at propping up the economy, new analysis of the pressures on the nation’s finances suggest the biggest deficit in dollar terms on record.

Before the first stimulus package to deal with the economic fallout from the coronavirus has been legislated, the government is working on a second one.

BIS Oxford Economics on Tuesday said instead of the forecast $5 billion surplus this financial year, the government was facing a deficit of at least 2.5 per cent of GDP or well above $40 billion.

The biggest hit to the budget comes in 2020-21 in which the government had been expecting to post a surplus of $6.1 billion. Instead, BIS expects it to be a deficit of at least 5 per cent of GDP or $100 billion.

A lift in spending plus a sharp fall in expected revenues is behind the wild swing.

The Morrison government is poised to announce billions of dollars in a support package for small businesses within days, specifically aimed at those in hospitality and tourism as the impacts of the virtual travel ban bite.

Senior government sources said the package would likely contain new measures aimed at helping businesses stay afloat if they are forced to temporarily shut their doors, while elements of last week’s stimulus package, such as wage subsidies and tax relief, will likely be “scaled up”.

It also remains in talks with the major airlines about waiving fees and levies to help them remain in business as traveller numbers sink.

Finance Minister Mathias Cormann said the government is “aware of what is in front of us” in the rapidly evolving situation.

“Indeed businesses will close and Australians will lose their jobs,” he said.

BIS chief economist Sarah Hunter said there is every chance the economic impact of the coronavirus outbreak would continue well into the second half of this year.

The Australian economy was unlikely to be fully functioning as normal until 2022 as it would take time for supply chains to become re-established while the travel sector would suffer a long-term hit to confidence.

“We don’t think it’s going to be possible for the economy to avoid recession,” she said.

The biggest postwar deficit of 4.2 per cent of GDP or $54.5 billion was recorded in 2009-10 under Kevin Rudd and Wayne Swan. Tax revenue suffered the biggest drop outside of the Great Depression while spending increased sharply.

Private sector economist and former adviser to prime minister Julia Gillard, Stephen Koukoulas, said the problem facing the budget was a spike in the number of firms that will not record a profit on top of a sharp lift in the number of people without a job.

“Companies that don’t make a profit don’t pay tax. Someone out of work doesn’t earn a wage or pay tax,” he said.

Treasurer Josh Frydenberg was already facing the prospect of raising the government’s self-imposed $600 billion debt limit.

Mr Koukoulas said large deficits over the next two or three years would mean debt approached $1 trillion. Forecasts around wages growth would also have to be downgraded, further hurting the budget longer term.

Senator Cormann declined to outline the potential impact of the government’s planned stimulus or downgraded economic forecasts to the budget but stressed it had been in an improved position before the virus outbreak.

“We are in a position to respond as strongly as we are and we have the flexibility to respond as strongly as we are because of having done the hard yards over the last six and a half years to repair the budget,” he said.

Shadow treasurer Jim Chalmers said the government needed to release new forecasts on the economy along with its stimulus package.

“We haven’t seen from the government an assessment of where they think the economy was at before and after the first stimulus package,” he said.

“That would be useful to… determine whether or not the measures that are being put in place are successful or not.”

State budgets will also be hit, through increased spending on their own stimulus packages and in falling revenue with GST receipts likely to drop sharply.

Moody’s Investors Service vice-president John Manning said the states’ bottom lines would come under stress.

“The stimulus measures announced by Australian states to address the significant economic fallout from the coronavirus will further challenge budgets in 2020 and drive debt burdens higher,” he said.

“However, under our baseline scenario, the increased spending – focused on protecting jobs, replacing income, stimulating consumption and labour-intensive capital spending – is manageable. Moody’s outlook for the rated Australian states and territories remains stable.”

Shane Wright is a senior economics correspondent for The Age and The Sydney Morning Herald. With Rob Harris

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