Budget deficit reaches $65 billion; Can Australia afford to extend subsidies?

  • Jul 06, 2020 AEST
  • Team Kalkine
Budget deficit reaches $65 billion; Can Australia afford to extend subsidies?

Summary

  • The federal government budget deficit ballooned to $65 billion, whereas government spending rose $32.9 billion more than planned, due to coronavirus induced recession.
  • Morrison has confirmed that Australia would record 2 largest budget deficits due to shrinking global economy and a need to roll out more support measures for the economy.
  • Cutting back of all fiscal support would be damaging as the economy is not yet strong to avert job losses and slowdown.
  • Parliament Budget Office predicted $191 billion revenue fall in 2019-20, and debt levels would be close to 15% of GDP or more than $550 billion at the end of this decade.

Australia’s budget deficit has swollen to $65 billion, eleven months into the financial year with revenues falling and spending hitting the roof amid coronavirus pandemic. As per the monthly financial statement released by the Finance Minister, Mathias Cormann on 26 June, underlying cash balance for 2019-20 financial year to 31 May 2020 was a deficit of $64.9 billion than a deficit of ~$4 billion projected in the mid-year budget update published in December 2019.

The government’s total receipts declined by more than $28 billion than mid-year update which included $13 billion fall propelled by entity’s tax receipts and income tax payments, as well as other withholding tax receipts by $5.9 billion.

The government spending was about $32.9 billion more than planned in an attempt to boost cash flows, provide JobKeeper payments, medical support and economic stimulus to the country. However, Mr Morrison stated that he did not regret any of his decisions taken as they were essential for best health and economic response amid COVID-19.

The fiscal balance for the year to 31 May 2020 was a deficit of $68.4 billion, about $71.4 billion adverse than the 2019-20 mid-year budget update surplus of $2.9 billion. The figures showed the fiscal effect of spending on JobKeeper and JobSeeker payments to support jobs and payments.

Australia to record 2 largest-ever budget deficits

PM Scott Morrison recently established that the country would record its 2 biggest-ever budget deficits in history due to COVID-19. Also, a short-term doubling up of unemployment allowances and $1500 a fortnight JobKeeper wage subsidies was disclosed in March to help people in financial distress amid coronavirus induced downturn.

The government now has plans to expend an additional $72 billion to accelerate 15 major transport and resource industry infrastructure programs to provide about 66,000 jobs on top of three active stimulus packages valued at $154 billion.

Morrison also stated that the finances were likely to get worse as global economic plunge has ruined the demand for Australian exports. He added that the record deficit was not only because of high expenditure due to coronavirus, but revenues have been equally affected. The impact on revenue is expected to be long-lasting as revenues have taken a large hit, and lower expenditure measures have been formed to be more targeted and time bound. A recalibration of fiscal strategy is needed for this to happen.

Withdrawal of subsidies in September

There is growing anxiety over unemployment and the withdrawal of subsidies in future. The government is due to announce its plans on JobSeeker and JobKeeper payments until a mini-budget is passed on 23 July that will comprise of comprehensive forecasts by Treasury on economic growth, unemployment, deficit and debt levels until the announcement of the full budget in October.

On 26 June, Morrison assured that he is going to ensure that policies are in place to aid people and there would be a subsequent step once wage subsidy ends in September this year. The details on the next step and the way it would appear is not clear. There are expectations of gradual phasing out of the JobKeeper scheme over an extended period for all those getting the payment. Further support can be given to sectors that are expected to remain affected for a longer period of time than others.

ALSO READ: Job Vacancies record the biggest fall while Job Subsidy nearing an end in Australia

Aviation and the arts sector have been hit harder than others, but government could provide only a limited support. The government must decide the length and extent of the support needed for the sectors.

The Australian Council of Social Service (ACOSS) executive, Dr Cassandra Goldie stated that she was heartened by the report to grow JobKeeper. Dr Goldie stated that there is a need for a strong safety net of 1.6 million people who have been locked out of paid work and above 2 million people are expected to need income support in September. She asserted that cutting income support back to $40 per day level as was during pre-COVID would have damaging effects for the economy. She also laid emphasis on people must having enough money to cover essentials like food, housing, and transport to lift employment.

Plans ahead

Morrison stated that he has plans to lift growth not just for coming months but for the next 5 years. Controlled expenditures and boosted revenues would be at the heart of government’s growth stimulus measures.

Deloitte Access Economics has predicted $143 billion deficit for 2019-20 equivalent to 7.3% of GDP and a $133 billion deficit for 2020-21 (7.2% of GDP).

The Parliament Budget Office has predicted $191 billion revenue crisis in 2020-21 financial year while debt at the end of this decade would be close to 15% of the GDP or more than $550 billion while the cost of coronavirus is inclined to reach $528 billion.

ALSO READ: 3 Signs you should look around Economic Recovery

Morrison government doubled unemployment benefits temporarily since the end of April, adding $550 coronavirus supplement to existing JobSeeker payment. Workers are also getting $1500 as part of the $70 billion JobKeeper program. Elimination of Job Keeper payments, as well as elevated JobSeeker payments, bank loan holidays and rental relief by September, will leave several Australians cash stripped amid the economic downturn. Economists have stated that the economy was not strong enough to prevent unemployment rate from surging and from its slow down if the fiscal support is withdrawn.

 


Disclaimer
The website https://kalkinemedia.com/au is a service of Kalkine Media Pty. Ltd. A.C.N. 629 651 672. The article has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine Media does not in any way endorse or recommend individuals, products or services that may be discussed on this site. Our publications are NOT a solicitation or recommendation to buy, sell or hold the stock of the company (or companies) or engage in any investment activity under discussion. We are neither licensed nor qualified to provide investment advice through this platform. All pictures are copyright to their respective owner(s). Kalkinemedia.com does not claim ownership of any of the pictures displayed on this website unless stated otherwise. Some of the images used on this website are taken from the web and are believed to be in public domain. We have used reasonable efforts to accredit the source (public domain/CC0 status) to where it was found and indicated it below the image.

 

There is no investor left unperturbed with the ongoing trade conflicts between US-China and the devastating bushfire in Australia.

Are you wondering if the year 2020 might not have taken the right start? Dividend stocks could be the answer to that question.

As interest rates in Australia are already at record low levels, find out which dividend stocks are viewed as the most attractive investment opportunity in the current scenario in our report.

CLICK HERE FOR YOUR FREE REPORT!
   
x
We use cookies to ensure that we give you the best experience on our website. If you continue to use this site we will assume that you are happy with it. OK