The government has set aside an election war chest from $15.9bn in mystery spending in a mid-year budget update that warns of significant economic risks ahead.
But despite the treasurer hailing an “incredible” set of job numbers, which shows Australia’s unemployment rate will fall comfortably below 5% next year, the government is holding off the task of budget repair until “economic recovery is secure”.
“These gains are not yet locked in,” Josh Frydenberg said on Thursday as he announced the mid-year economic and fiscal outlook (Myefo).
“The pandemic is still with us and we must continue to learn to live with the virus as demonstrated by the recent emergence of the Omicron variant.”
The economic update – potentially the last before the election – shows a combined $15.9bn in expenditure for decisions “taken but not yet announced” and other mystery spending that is not for publication. Treasury officials suggested the spending was split about 50-50 between these two categories.
Frydenberg dismissed suggestions this was an election fighting fund, and refused to provide a breakdown of the figure, which allocates almost $10bn to spending this year and next year across both categories.
“They are measures that we expect to eventuate, but at this point, we can’t allocate and confirm to specific programs,” he said.
“What goes into a contingency reserve can be a number of specific initiatives, including those that are commercial in confidence and therefore can’t be revealed.”
Last year’s Myefo allocated just $1.5bn for similar unannounced measures, but the figure routinely balloons ahead of each federal election.
Frydenberg said this spending could include the purchase of vaccines or other necessary health supports, as well as reserves for decisions made that would be confirmed in the March budget.
There is also $940m in unknown revenue measures due to decisions taken but not announced or not for publication.
Labor’s shadow treasurer Jim Chalmers slammed the government’s economic update, saying it was “more of the same rorts, more of the same waste, more of the same missed opportunities” that had characterised the government.
“What they don’t understand is this. You can’t rort your way to recovery. We don’t want to see secret slush funds before the election and secret cuts to the budget after the election,” he said.
He said there was little focus on trying to build an economy and society that was better than before the pandemic, saying it “completely ignores” the issues of stagnant wages, skills shortages and job insecurity.
The unemployment rate in 2021-22 is expected to be 4.5%, down from the 5% forecast in the May budget, dropping to 4.25% in 2022-23.
Frydenberg said the “record high” employment means there were now 180,000 more people in work than at the start of the pandemic.
Wage growth will begin to outpace inflation in 2022-23 when wages are expected to grow 2.75% compared to an inflation rate of 2.5%. Wages then grow 3% in 2023-24 and 3.25% in 2024-25, compared to inflation of 2.5% in both of these years.
In 2020-21, inflation was more than double the rate of wage increases.
The government has downgraded its growth forecasts to 3.75% in the current financial year, down from 4.25% forecast in the May budget, but has upgraded its gross domestic product forecasts for next year to 3.5%, up from 2.5%.
The following year, in 2023-24, growth then falls to just 2.25%, below Australia’s average pre-pandemic growth rates, before lifting to 2.5% in 2024-25.
Frydenberg flags uncertainty
While the treasurer said Australians had reason to feel confident about the forthcoming recovery, the budget papers warn that the government numbers could be “substantially different” to those forecast, depending on what happens with the pandemic.
It assumes that lockdowns and state border closures are no longer required, most domestic restrictions are lifted by early in 2022, and “only baseline levels of physical distancing and density restrictions” remaining in the first half of next year.
“The Omicron variant is not assumed to significantly alter current reopening plans or require a reimposition of widespread health and activity restrictions,” the document says.
However, after the Delta variant proved more of an impediment to the global economic recovery than anticipated at the budget, the papers also warn that the global economic outlook will remain “susceptible to new waves of the virus for some time”.
“The ongoing impact of the pandemic means the economic outlook remains highly uncertain,” the Myefo papers say.
Myefo outlines two different scenarios – one better, and one worse than the budget papers forecast.
In a “downside scenario” predicated on new variants of concern requiring a significant response and local lockdowns, economic activity would be around $20bn lower in 2021-22, wiping 1 percentage point off GDP in 2021-22 and hiking unemployment up by 1%.
In a possible “upside scenario” where households and businesses started to spend savings more quickly, economic activity could increase by around $30bn across 2021-22 and 2022-23, a GDP increase of 0.5% this year and 1% next year compared to forecasts.
Employment would be stronger in this scenario, putting downward pressure on unemployment, but the impact is likely to be small as it would also encourage greater participation.
“On the downside, the new Omicron variant highlights the ongoing risk of outbreaks which have the potential to damage confidence or require a reimposition of health measures and activity restrictions,” the papers say.
Despite a $95bn upgrade in tax receipts over the four-year forward estimates, spending on the NDIS of $26.4bn and $25bn in extra Covid support payments has seen the government deficits across the forward estimates remain relatively unchanged.
Budget deficits set to continue for years
The government has posted a revised deficit of $99.2bn for this year, a $7.4bn improvement since May. But across the forward estimates, the cumulative deficits are only $2.3bn better than forecast, leaving a $57.5bn deficit in 2024-25, the equivalent of 2.3% of GDP.
The cumulative budget deficits, which were forecast at $342.4bn in the May budget, now total $340bn.
Over the medium term, the budget is still expected to remain in deficit by 2031-32, improving to a deficit of 1.8% of GDP in ten years’ time.
Gross debt, which tops $1tn in 2022-23 and is expected to stabilise at about 50% of GDP in the medium term, has come down slightly since the May budget.
Confirming another element of the government’s deal with the Nationals to secure their support for the government’s net zero emissions target, the Myefo also includes an extra $300.1m to the building better regions fund. This is in addition to the $250m committed in the May budget for a sixth round of the project, taking the total to about $1.4bn.
The Myefo papers also show the government has agreed in principle to the extension of inland rail from Toowoomba to the Port of Gladstone in Queensland – a project long promoted by Barnaby Joyce – “subject to the outcomes of the business case demonstrating the project is economically beneficial”.
The improved unemployment rate – which refers to the share of the labour force that is without work and seeking employment – suggests an extra 150,000 people will be employed by 2024-25 across the economy than forecast in the May 2021-22 budget.
The strong jobs growth will result in a record employment-to-population ratio of 63.1% by the September quarter next year.
The lower than forecast unemployment rate is in line with the government’s updated “non-accelerating inflation rate of unemployment”, called the Nairu, which is the jobless rate at which inflation and wages are then expected to rise.
But the treasurer, who had previously flagged the government would turn to the second phase of its economic recovery plan once the unemployment rate was about 4%, said there remained much uncertainty in the economy.
“There’s a great deal of uncertainty right now. We’re living in the middle of a pandemic, the biggest economic shock since the great depression,” Frydenberg said.
The Myefo papers show a total of $337bn in commonwealth support has been spent as a result of the pandemic, equivalent to 16.3% of GDP.