- Australia’s budget deficit has shrunk quickly as the nation rapidly recovers from its COVID-induced economic lull, according to a new report by Deloitte Access Economics
- Government support has been stripped back, job gains are up, and commodity prices are surging, taking the deficit to $52 billion — less than the share of the economy the deficit averaged over the past decade
- Deloitte predicts the FY22 deficit to be $69 billion all up, which is $30 billion lighter than what was officially forecast in the government’s pre-Christmas budget update
- However, the looming federal election means the government might introduce bold promises and spending policies in an effort to win voters over
- This could spell trouble for the medium term: government needs to save $40 billion a year by 2026 to shrink debt ratios to be in the order of 2 per cent of national income
Australia’s budget deficit has shrunk “stunningly” quickly as the nation rapidly recovers from its COVID-induced economic lull, according to a new report by Deloitte Access Economics.
With government pandemic support largely removed, job gains up and commodity prices surging, Australia’s budget deficit is down to $52 billion, which is less than the share of the economy the deficit averaged over the past decade.
What’s more, Deloitte said it predicted the FY22 deficit to be $69 billion all up — $30 billion lighter than what was officially forecast in the government’s pre-Christmas budget update.
Over the next few years, Deloitte predicts an annual budget deficit of $67 billion and $65.5 billion over the 2023 and 2024 financial years, respectively, before a drop to $51 billion in FY25.
Comparatively, official budget forecasts predict $99.8 and $88.5 billion deficits for FY23 and FY24, before a major drop to $57.5 billion in FY25.
However, Deloitte warned that with unemployment heading to its lowest point in half a century and Australia’s economic recovery soaring, policy may need to wind back even further.
“Even with COVID costs now much smaller, policy settings are still highly supportive at a time when they no longer need to be,” Deloitte Access Economics partner Chris Richardson said.
“The RBA should tighten next, and the government shouldn’t ease.”
The RBA has already begun to tighten monetary policy after two years of striving to keep the economy afloat amid the pandemic. Deloitte said while history was “littered” with examples of the central bank withdrawing support too soon, it may be time for the RBA to step things up a notch.
The concern is that with a federal election looming and the ruling party trailing in the polls, the government may introduce bold promises and policies in an effort to win voters over.
Too much spending too quickly could undo much of the work done so far to bring the economy into the sturdy position it is in today.
Deloitte said the government would need to save a little over $40 billion a year by 2026 to shrink debt ratios to be in the order of 2 per cent of national income. However, crafting policies to save this much money is certainly not something either side of the election would want to talk about.
“Australia’s past discipline left us superbly placed to use the budget as a shield in COVID. We want to rebuild our defences to be ready to do the same in a future crisis,” Mr Richardson said.
Moreover, with increased spending on some social services and a bolstered defence budget, Australia is more expensive to run than it has been before.
“The near-term budgetary news is good, even if the medium budgetary news is bad.”
The Deloitte report added that “horror stories” about rising interest rates were only half of the picture — there is actually some benefit to higher rates given most big COVID borrowings were made when rates were at their lowest and will last for a decade.
This means costs associated with rising rates will come slowly, while the benefits associated with a “reflating” economy — like wages and profit growth — will come sooner.
That, according to Deloitte, is a net positive for the budget.