The current recession is very large. Subject to the key caveat that forecasts are subject to really wide bands of uncertainty, Deloitte Access Economics estimates that national income will fall 1.8 percentage points ($35 billion) below the official projections in the Mid-Year Economic and Fiscal Outlook in 2019-20, followed by a jaw dropping shortfall of just under $200 billion (or 10.8 percentage points) in 2020-21.
Even worse, the recovery thereafter may well be slow:
- Families and businesses have had body blows to their confidence, their income, and their wealth. So they will be more cautious about taking risks – which is why we forecast business investment to drop more than any other part of the economy.
- And the Reserve Bank is already pedal to the metal, meaning this is the first recession-and-recovery that you have lived through in which the Reserve Bank is essentially already out of ammunition.
- Finally, Australia will be outperforming the global economy. But that global weakness may undercut the prices we receive for our resource exports – as is already notably true for gas.
So our nation will begin its economic recovery with unemployment high, the private sector scared, the Reserve Bank tapped out, and prices for our key exports weak. That says Australia’s recovery will be strikingly dependent on the extent to which our governments – federal and state – switch their policies away from the virus sprint and towards the recovery marathon.
That is why there is a very strong case for federal and state governments to keep going hard and going smart through this recovery – accepting a further period of higher deficits (for example, due to more infrastructure spending) and championing a new round of much needed economic reforms.
When can governments ease up once more? Our defence against the coronavirus has been world-leading. But just beating back the virus isn’t enough. The ‘mission accomplished’ signs can’t be put up until unemployment is back at 5 per cent. On our forecasts, that doesn’t happen until late 2024.
Big deficits are here
Assuming that policy remains unchanged from here – the usual technical assumption – we estimate that the federal government will run fiscal deficits of $143 billion in 2019-20 and $133 billion in 2020-21. That will then drop to $60 billion in 2021-22 and $37 billion in 2022-23 as the current emergency policy measures pass and as the damage to the economy eases a little.
This too shall pass – but not for some time
Rainshadow risks? There are three key risks to the tax take beyond the immediate crisis:
- The speed of recovery may frustrate: After an initial bounce as businesses re-open, the subsequent recovery in the economy and in jobs may be slower than we would all like.
- Economic damage may linger: And the hit to national income may linger for some years, partly because businesses won’t have invested as much during the crisis and its aftermath, and partly because the weaker world economy may leave a mark on commodity prices.
- Tax lags: Finally, the tax system has built in lags through accumulated losses. That will slow the rebound in income tax receipts (which includes capital gains) for individuals, companies, and super funds, as well as revenue from other taxes (such as resource rent taxes).
So neither the economy nor the budget will be fighting fit for a while yet.
The damage to the budget is temporary rather than permanent
The upshot is that the budget has just taken enormous damage. But it probably isn’t permanent damage.
That is a vital distinction. And much of the debate already swirling about ‘budget repair’ misses that key point. Of all the vast spending by the Federal Government to fight our way through the current crisis, only a handful of dollars are still being paid out in 2021-22.
Deloitte Access Economics sees large ongoing budget deficits in 2021-22 and 2022-23. But that is because we forecast ongoing weakness in the economy – especially in job markets.
But if the economy gets better, so too will the budget balance.
That underscores a key point that Deloitte Access Economics has been making: the need to let growth in the economy shrink the debt, rather than letting attempts to shrink the debt hold back the economy.
What should we do?
This has been the fastest moving crisis policymakers have ever had to navigate. And Australian policymakers can be proud of their record: our defence against the virus has been world class.
That success has come at a big cost. But that cost – and what to do next – isn’t well understood.
Yes, the budget is badly bent, but it is not broken. Today’s emergency policy measures are temporary. When they are gone, the budget will still be running big deficits: but that will be because the economy is still weak.
Many people don’t understand that, so they are chasing down imaginary problems. Some are arguing for immediate budget repair, while others say immigration needs to be overhauled.
Both those prescriptions are misguided. The key problem Australia will face on the other side of this crisis will be unemployment. Although joblessness will go down fast as Australia reopens, we are years away from returning unemployment to the 5 per cent rate it was at when this crisis hit. Even more challenging, governments will have to drive unemployment down without any help from the Reserve Bank, as the Reserve is already tapped out.
That has never happened in our lifetime, so we are not used to thinking about it. But it means the budget’s fight against the virus has to morph into a fight against unemployment. That will need different policies. It means doing more with federal and state budgets to drive job gains. That may, for example, mean we need scaled down wage subsidies for a time in the hardest hit small businesses. And we need other job generators, such as infrastructure.
So rapid budget repair would be misguided: the budgetary damage isn’t structural, but the damage to our economy and our jobs would be if we start raising taxes and cutting spending.
Nor have we just messed up the lives of our younger generations with all this extra spending. We had to do it, and the job prospects of the young always suffer most in recessions – so they will be big beneficiaries of the spend. Even more importantly, interest rates have never been lower. The extra borrowing costs from all these dramas will only cost the average taxpayer around $3 a week.
Nor would keeping borders closed help bring the unemployment rate down faster. Migrants don’t steal jobs. Australia had this debate in the 1970s, when the evil people accused of stealing jobs were … married women. If someone takes a job, then they earn an income, they then spend that income, and that creates the next job. Our job markets aren’t a Game of Thrones episode. If you truly thought migrants stole jobs, then you would believe married women stole jobs. And you would never want to have any children, because those kids would grow up and steal all the jobs.
Australia has a strong migration program because it makes sense for us to do so – and it will again on the other side of this crisis. We have what the world wants. Getting young, skilled migrants is a smart play for us. But what we haven’t done over the past two decades is match our fast population growth with a matchingly strong infrastructure spend. That has led to pressures on transport, health and education systems in the outer suburbs of our biggest cities.
It is time to go hard and go smart
To beat the new challenge – unemployment – Australia needs to see a combination of ‘going hard’ (ongoing policy support) and ‘going smart’ (unlocking reform).
On the latter front, if we want to give our newly unemployed the best chance of getting their livelihoods back, then we need to be the smart nation that we have so often talked about. That will give businesses – big and small – a reason to take bigger bets on the future, unlocking more investment, and with it the potential for more job gains. If we want more growth, then it makes good sense to raise the economy’s growth potential.
This blog post is based on Deloitte Access Economics’s Budget Monitor Issue #97, The virus sprint and the recovery marathon, released on 11 May 2020.
Recent Comments