Australia’s ‘red-hot recovery’ to bring dramatic turnaround in budget fortunes, report says | Australian economy

Australia’s “happier” economy means more people are in jobs than before the global Covid pandemic, which is helping to drive an improvement in the budget bottom line of almost $100bn over the next four years, new analysis shows.

The closely-watched pre-budget report from Deloitte Access Economics finds that more jobs, high iron prices and strong consumer spending are behind a dramatic turnaround in the budget’s fortunes compared to dire forecasts outlined by Treasury late last year.

But while living standards are growing faster than their decade average through to 2020, the report warns that sluggish wage growth will continue to be a feature of the Australian economy, predicting slower growth in average earnings than Treasury estimates.

The rosier than forecast budget outlook comes after the treasurer, Josh Frydenberg, flagged the government will continue to boost the economic recovery with fiscal support, including for female dominated industries.

Labor has welcomed the economic recovery, but is arguing it would be better still if the government had done a better job of hotel quarantine and the vaccine rollout.

On Sunday, the government unveiled details of a $1.7bn childcare package directed at low and middle income families, arguing it would remove disincentives for workforce participation while driving jobs and economic growth.

Frydenberg used a major pre-budget speech last week to suggest the government would not be taking any turn toward austerity amid the ongoing uncertainty created by the Covid-19 pandemic, saying economic recovery and a target unemployment rate of between 4% and 5% was needed before the government turned its focus to budget repair.

The Deloitte report backs this approach, saying that attempting budget repair too early would hurt economic recovery and therefore the health of the budget in the medium term.

But in an immediate boost to the budget outlook, the report says the better jobs environment has lifted the budget bottom line by $17bn in 2020-21, followed by a further $3bn in 2021-22.

And while the economy remains under a lot of pressure, national income is stronger than anticipated, driving “beautiful momentum across all the key drivers of the tax take” – namely jobs, profits and spending.

Consumer spending is holding up, with “relaxed, comfortable and cashed up” families underpinning an upward revision of the GST take. In total, Deloitte estimates that revenues will be up by about $21bn or 4.2% in 2020-21, and by $28bn, or 5.6%, in 2021-22.

The combination of lower unemployment, recovering tax revenues and less emergency spending on programs such as jobkeeper has Deloitte estimating the government’s underlying cash deficit will be $167bn this financial year, and $87bn next year – a combined $53bn improvement on Treasury forecasts.

Across the four years to 2023-24, the report says deficits will be $98bn better than forecast last October.

“That’s stunningly good news. The budget is getting better rapidly because the economy is getting better rapidly,” the report says.

But it also points out that while the forecasts “are way ahead” of Treasury’s latest projections, the deficit is still an “eye-watering” $95bn larger than Treasury projections for 2021 issued in late 2019, before the pandemic hit.

Deloitte also predicts smaller deficits in 2022-23 and 2023-24, saying the “red hot recovery” experienced by Australia will see the country avoid the “phase of sackcloth and ashes” expected by Treasury.

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“Recessions usually leave gigantic hangovers for the tax take. That’s because businesses lose money in recessions, and those losses can be offset against tax bills in later years,” the report says.

“Yet our red hot recovery means we mostly dodged that bullet – far fewer businesses made losses than Treasury expected, and that means heaps more money in the door in 2022-23 in particular.”

And despite the “loads more debt” taken on by the country to shield the economy from the Covid-induced downturn, the low interest rate environment means the cost to government will be lower in 2023-24 than in 2018-19.

Looking further ahead, the Deloitte report points to the need to slowly start the task of budget repair, saying “whether we like it or not, we’ll need to cut some spending and raise some taxes.”

It says that if the government pushes ahead with the phase three tax cuts, then budget repair will go backwards in 2024-25, with the $17bn cost of the measure needing to be accounted for.

However, it argues that without further tax reform, including the cut for higher income earners, the “worst features of the system” will remain in place.

“A key aim of the reform was to simplify the tax scale without affecting fairness. But if we stay stuck where we are today, then we’ll have added complexity and worsened fairness,” Deloitte says.

On wage growth, report author Chris Richardson said things would only improve once unemployment and underemployment were driven to below pre-pandemic levels, but more jobs was the trade-off for weak wages growth.

“It is the last thing that gets better in the economy,” he said.

The report’s forecasts show wage growth of 0.7% next year, growing to 2.2% by 2023-24.

Labor’s shadow treasurer, Jim Chalmers, said the credit for the country’s economic recovery “belongs to the Australian people” who had limited the spread of the virus, and said the government’s “fumbling” of the vaccine rollout and hotel quarantine program had slowed the recovery.

“The economy is recovering from the deepest, most-damaging recession we’ve had in this country for almost 100 years. That recovery is welcome, it’s pleasing, it’s expected, but it’s also uncertain, and uneven and patchy,” Chalmers told Sky News.

“We need to recognise that there are still almost two million Australians who can’t find a job or can’t find enough hours to support their loved ones.”

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