Even if the government hadn’t spent A$5.9 billion on JobKeeper and other emergency measures last financial year and wasn’t planning to spend a further $12.2 billion this financial year, its budget position would have collapsed.

The economic statement^[1] released Thursday morning shows it collected $13.2 billion less company tax than it expected last financial year, and will collect $12.1 billion less this financial year.

It collected $9.2 billion less personal income tax last financial year and will collect $26.9 billion less this financial year.

That’s assuming the present lockdown in Melbourne, the Mornington Peninsula and the Mitchell Shire lasts only six-weeks followed by a gradual return to normal and no further lockdowns.

Reality bites

Goods and services tax and excise and customs duty collections are down by $7.3 billion last financial year and down by a forecast $10.7 billion this financial year.

Tax collections from super funds held up in the financial year just ended but are expected to halve in 2020-21, collapsing from $13.2 billion to $6.4 billion.

The collapse reflects what Treasurer Josh Frydenberg called “the reality of where the economy is at”.

Business are closed, planned investment has been axed (non-mining business investment is expected to fall 19.5% this financial year after falling 9% last financial year), consumers are staying at home, and spending on housing is expected to fall 16% after falling 10%.

It has to be lived with

Most of this can’t be undone. Nor can it be offset by increasing tax rates or cutting government spending. As Finance Minister Mathias Cormann noted, that would shrink private spending further.

Net government debt, which was expected to be close to zero last financial year (0.4% of GDP) instead blew out to 24.6% of GDP and is expected to blow out to 35.7% this financial year.

The only safe way to bring it down is to ramp it up as much as is needed to ensure the economy recovers.

As Cormann put it,

the way to get on top of this debt is by growing the economy more strongly and creating more opportunity for Australians to get ahead, get into jobs, better paying jobs and get ahead, because stronger growth leads to more revenue and lower welfare payments and that is the way that we can go back to where we were

It has worked before. Australian government debt blew out to more than 100%^[2] of GDP during the second world war but then shrunk year by year in relation to GDP in the economic growth that followed.

Debt didn’t shrink in absolute terms, it shrank in relation to the government’s ability to handle it, and that’s what will happen again if economic growth can be reignited.

The government has been borrowing at annual interest rates of less than 1%. If the economy can grow by more than 1% per year, which historically it has, the payments will eat into less and less of the budget.

Finances are holding up

Next week the government’s office of financial management launches an audacious bid to lock in ultra-low borrowing rates until the middle of the century.

It will issue an unusually long-dated bond (lone) lasting 31 years. It won’t need to be repaid until 2051.

It has appointed five lead managers to sell it – ANZ, Commonwealth Bank, Deutsche Bank, JP Morgan Securities and UBS – in the hope that it can bed down low annual interest payments for a generation.

In the unlikely event the market doesn’t support it, the Reserve Bank has undertaken to step in and use created money to buy as many bonds as are needed^[3] to keep the rates low. Since it made the commitment in March it hasn’t needed to spend much at all^[4]. Government bond issues have been up to five times oversubscribed by investors desperate for the certainty of a government revenue stream and uneasy about riskier alternatives.

Best case

The forecasts for what will be required need to be seen as best case. The budget deficit is believed to have blown out from an expectation of around zero to $85.8 billion in 2019-20 and $184.5 billion^[5] in 2020-21.

Those forecasts have the unemployment rate at 8.75% by this time next year, by which time the economy will have shrunk 2.5%

Economic activity slipped 0.3% in the March quarter, is believed to have shrank 7% in the June quarter, is expected to climb back 1.5% in the September quarter and to claw its way back after that.

Read more: Budget deficit to hit $184.5B this financial year, unemployment to peak at 9.25% in December: economic statement^[6]

That’s if restrictions aren’t reimposed, state borders are reopened and there are no further “second waves” of infections.

The treasury says its estimates take into account the effect of the Melbourne outbreak on consumer confidence and activity in the rest of Australia, but assume the outbreak does not spread.

In this way the numbers are a best case. The section in the document on risks to the outlook was unusually short – only three paragraphs.

It says the pandemic is still evolving and the outlook remains highly uncertain.

It will present a fuller assessment of the risks and four years of projections in the formal budget on October 6^[7].

References

1. ^{^} economic statement (budget.gov.au)
2. ^{^} 100% (assets.documentcloud.org)
3. ^{^} as many bonds as are needed (theconversation.com)
4. ^{^} spend much at all (www.rba.gov.au)
5. ^{^} $184.5 billion (budget.gov.au)
6. ^{^} Budget deficit to hit $184.5B this financial year, unemployment to peak at 9.25% in December: economic statement (theconversation.com)
7. ^{^} October 6 (ministers.treasury.gov.au)