Australia to record biggest postwar deficit in 2020 

Summary

• Lately, Australia recorded a budget deficit of $86 billion amid COVID-19 and is projected to grow over $184 billion in 2020-21.
• The official unemployment rate is expected to peak at 9.25% in December quarter, while real GDP is likely to fall 2.5% in 2020-21, as per Treasury.
• Treasury predictions are built on second round of lockdown in Victoria for 6 weeks beginning 9 July, after which restrictions are supposed to be lifted slowly.
• JobKeeper program received an extension until March 2021, though with lesser payments and stricter eligibility rules that would drive millions of workers off the program by Christmas.
• Victoria might be the worst hit state, with predictions of about 200k people to be out of work by September.

The budget deficit of Australia has reached ~$86 billion for 2019-20, the highest deficit since World War 2, as announced by Treasurer Josh Frydenberg on 23 July.

The Federal Government has deferred the budget to October but released an economic and fiscal update, which revealed the extent of the economic devastation caused by coronavirus pandemic.

Morrison government has called it a debt and deficit challenge and cautioned that voters would take more than a decade to repay the debt, but it is required to protect jobs and the economy.

The Treasurer stated that Australia is witnessing a health and economic crisis that has not been seen in the last 100 years. The deficit is projected to swell even more with the Government predicting a blowout of more than $184 billion, about 9.7% of GDP, in 2020-21.

The update was followed by Victoria recording 484 new cases on 22 July, termed as Australia’s worst day that recorded the biggest spike in coronavirus cases. Further, Morrison government declared that tax revenues had taken a $95.6 billion hit, which was a consequence of coronavirus.

Mr Frydenberg stated that Australia persisted to contain a small debt-to -GDP ratio as opposed to other nations. The country has been stronger than almost any other of its counterparts in the world on the environmental and economic front.

Here are few expectations on economic figures:

• Budget surplus was forecasted at $5 billion for 2019-20, but coronavirus spending initiatives including $86 billion JobKeeper wage subsidy have taken debt to record levels.
• Net debt levels are anticipated to reach $488 billion in June end, and are expected to grow beyond $677 billion (36% of GDP).
• Gross debt stood at $684 billion in 2019-20 end and is tipped to be nearly $852 billion in 2020-21.
• Income from tax dropped $31.7 billion in 2019-20, and a $63.9 billion fall is expected for the same in the current financial year.

Mr Frydenberg conveyed that Treasury had built its predictions on Victoria being under the second round of lockdown for 6 weeks beginning 9 July, after which restrictions are assumed to be lifted slowly.

The jobless rate to peak at 9.25% in December

Treasury has estimated that the unemployment rate is expected to peak at 9.25% in the December quarter, warning small businesses to get ready for an extended economic downturn. It expects the headline unemployment rate to peak heading into Christmas, before labour market conditions get better slightly, which will witness unemployment rate to round out 2020-21 at 8.75%.

The Treasury also estimates a 3.6% rise in the unemployment rate through to June 2021 from 5.1% reported in February before coronavirus pandemic. Real wage growth would fail to increase across that time and is likely to increase only 1.25% in nominal terms.

The forecasts were preceded by Morrison government’s announcement on extension of JobKeeper program through to March 2021, with reduced payments and tighter eligibility rules. The rules will push millions of workers off the program by Christmas.

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The official unemployment rate for the country has been recorded at a 19-year high of 7.4% in June 2020, but it did not account for people who are in jobs due to JobKeeper wage subsidy or people who are no longer in the workforce.

The Government has asserted that the effective unemployment rate is at 11.3%, down from more than 13% in recent weeks. About 870k jobs have been lost between March and May, while above 1 million witnessed their working hours condensed or become 0.

The Government expects further increase in the unemployment rate, likely to be driven by rising labour force participation, as those who dropped out of the labour force at the beginning of the crisis would start to look for work again, as the economy opens up.

The jobless rate would start falling down steadily from the beginning of 2021 and would drop to about 8.67% in the June quarter of 2021.

ALSO READ: The new JobKeeper might cause bankruptcies for businesses

Frydenberg has forecasted that both the unemployment rate and the effective unemployment rate would start to converge as restrictions are lifted, more people would go back to work, and fewer people will be on 0 hours. However, the official unemployment rate would persist increasing throughout 2020.

Further, people in Victoria will be the most affected. Victoria’s Treasurer Tim Pallas has divulged that 200k Victorians will be without work by September.

ALSO READ: Australia at risk of next wave of infections, Victoria announced $534m business support package

As per the latest update, Australia’s inflation-adjusted GDP is anticipated to drop 2.5% in 2020-21, and by 7.5% in the June quarter. While CPI is likely to fall 1.25% in 2019-20 before rising 1.25% in 2020-21 due to cuts in spending and an increase in unemployment.

The huge budget deficit is unlikely to hurt AAA credit rating of Australia, although the threat of a downgrade is still high, as per S&P rating statement on 23 July. The agency stated that the Australian economy would start to recover in fiscal 2021, with an improvement in Government’s fiscal balances in upcoming few years.