Treasurer Josh Frydenberg has released one of the laziest budget updates in decades.
The Mid Year Economic and Fiscal Outlook (MYEFO) for 2021-22, which presents details of the Government’s spending and tax receipts as well as the path for government debt and a detailed update on Treasury’s forecasts for the economy, shows huge budget deficits despite a strong outlook for the economy.
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The massive budget deficits beyond this year are there, not because the economy is confronting a period of weakness, nor are they based on an assumption that new COVID variants will see large swathes of the economy forced into lock down.
They are huge because the Treasurer continues to spend money like a drunken sailor, with nothing in the updated policy settings aimed at moving the Budget anywhere near balance.
Government delivering deficit after deficit
There are deficits for as far as the eye can see, and this means until at least 2031-32 - where the MYEFO shows a budget deficit of 2 per cent of GDP, or around $45 billion in today’s dollar terms, in that year.
The MYEFO shows clearly how the Budget has been fractured by COVID, but made worse by a series of tax and spending decisions unrelated to the pandemic and the economic shock that resulted.
For the four years to 2024-25, there are $340 billion of cumulative budget deficits. This follows cumulative deficits of $229 billion in the preceding two years.
Since the Coalition came to government in 2013, it will have delivered budget deficits totalling a staggering $730 billion, including out to the forward estimates.
This is why gross government debt is forecast to hit $1.2 trillion in 2025, up from what now looks to be a measly $273 billion when the Coalition was swept into government in 2013 on a promise to run budget surpluses and pay off government debt.
Deficits despite strong growth forecasts
It must be emphasised that these baked-in budget deficits are not because the economy is weak. On the contrary, the economic forecasts are for robust growth.
GDP is expected to grow a healthy 3.75 per cent in 2021-22, followed by growth of 3.5 per cent in 2022-23. This growth momentum will see the unemployment rate slide to 4.25 per cent, with wages growth and inflation poised to pick up.
The current policy framework is so misguided that in this period of strong growth, with full employment, the budget deficit will never fall below 2 per cent of GDP.
As the economy improves, the case for some fiscal policy tightening is strong. Unquestionable, in fact.
The discussion about interest rate hikes is part of that conversation, focusing on the strong economy and rising inflation.
For the Budget, part of the repair to the bottom line can be in the form of doing nothing and letting the so-called ‘automatic stabilisers’ work.
This means using the strong economy to collect more tax as the economy booms, without the need to change policy, and at the same time, spending less as the stronger economy dampens the call on government funds.
The MYEFO also shows that the Government will be spending $14.8 billion in 2021-22 on interest on debt. This rises to $17.6 billion in 2024-25.
And this is in the current climate of record-low interest rates.
These debt- servicing costs could quickly rise with a structural lift in rates.
Fresh policies vital but unlikely
The next federal election is just a few months away. Whichever side wins, the hard work to fix the budget mess outlined by Frydenberg in MYEFO should be a policy priority.
This might mean some changes to government spending and tax policy, which could work alongside the automatic stabilisers to get the budget deficits lower.
It’s unlikely the election campaign will throw up any policies to do this. On the contrary, there are likely to be promises that not only make the budget deficit wider, but throw fuel on the fire of a strong economy, adding pressure on the RBA to hike interest rates.
Fixing the Budget won't be easy but it needs to be done after the missed opportunity in the MYEFO.