The Australian government is on track to deliver deficits totalling nearly $240bn over four years, an estimated improvement of $100bn since the last budget, a respected economic forecaster says.
With the government due to publish a budget update on Thursday, Deloitte Access Economics has released its own predictions for an improved bottom line, arguing the economy has been recovering much faster than Treasury assumed seven months ago.
Deloitte says the rapid uptake of vaccines will deliver a “more reliable” economic recovery – but warns that the budget will remain under pressure because government spending on aged care, disability and mental health is still “in catch up mode”.
With the government preparing for an election by May, and with both major parties already stepping up their campaigning, this week’s budget update will set the scene for a battle on competing economic visions.
The government has brought forward next year’s budget to March, apparently to allow it to deliver a major economic statement before officially launching an election campaign, but Scott Morrison retains the option of going to the governor general any time after the summer break.
The budget delivered in May this year estimated an underlying cash deficit of $106.6bn in 2021-22, followed by years of red ink including a shortfall of $57bn in 2024-25. Those four years of deficits added up to $342bn.
Deloitte, in a new forecast released on Sunday night, predicted deficits totalling $239bn over the same four-year period – on the proviso that the Omicron variant “doesn’t send many Australians back into lockdown for lengthy spell”.
“Our latest assessment is that Thursday’s budget update will reveal lower cash underlying deficits to the tune of $103bn,” said the Deloitte Access Economics partner Chris Richardson.
“That’s remarkable, given everything that’s gone wrong in the seven months since the budget was released, including Delta’s dawn, iron ore’s collapse, and multi-billion dollar rescue packages.”
Deloitte argued that the economy had been recovering faster than Treasury previously assumed. “Even when Delta locked down half the population, the damage to the economy was just a fraction of that in mid-2020,” it said in a statement.
“Given that the best way to repair the budget is to repair the economy, that combination of resilience and recovery is helping the budget get its mojo back.”
Australia’s surge in vaccinations since early August was “really good news for both the economy and the budget”, according to Deloitte’s analysis, because it indicated the country’s “path from here on is safer and more reliable than that of less vaccinated nations”.
The upbeat assessment also reflects a difference between Deloitte and Treasury on a key economic indicator.
Deloitte said Treasury’s budget-time assumptions “saw the nominal economy travelling at crawl speed across an unusually long period of time”.
While Treasury predicted national income growing at an annual average rate of just 2.8% across the six years between Covid arriving in 2019-20 and the end of 2024-25, Deloitte puts this measure at 4.2%.
Richardson said the budget recovery was “remarkable” but “not enough”.
“A range of commissions and reports indicate that Australia government spending is still in catch up mode for aged care, disability and mental health,” Richardson said.
“And at the same time the world has become more dangerous for Australia, so Defence costs have some catch up ahead too. That says the budget will be under pressure for some years to come.”
Richardson said if voters heard “costly promises from politicians in the months ahead” they should treat them with “considerable caution”.
The government has attempted to put economic recovery at the centre of its re-election pitch.
On Sunday, while announcing that booster shots would be available after five months, the health minister, Greg Hunt, said the Coalition knew “how to give people the best chance at the life of their choice”. He argued Labor would have “no control of the budget”.
But the Labor leader, Anthony Albanese, argues Covid has “shone a cold, unflinching light on some hard truths about our economy and its vulnerabilities”.
At a campaign-style rally last weekend, Albanese pledged to deliver a “stronger, fairer and broader economic recovery” with a focus on secure, well-paid jobs. He said re-electing the Morrison government would ensure “a second decade of stagnant wages that don’t keep up with rising bills”.