The government is staring down the barrel of massive budget deficits for the foreseeable future, but more spending will be needed to grow the economy out of them.
Deloitte is now forecasting an underlying cash deficit of $198.5 billion. That’s $14.0 billion worse than Treasury’s July prediction, and could grow if more stimulatory policies are announced – something Deloitte believes the government should be considering.
“The budget has therefore taken enormous damage – but it probably isn’t permanent damage,” said Deloitte Access Economics partner Chris Richardson.
“Yes, the budget is badly bent, but it’s not broken. Today’s emergency policy measures are temporary. When they’re gone, the budget will still be running big deficits but that will be because the economy is still weak.”
Mr Richardson believes the key challenge is now in switching from protecting jobs to creating them, with families and businesses set for a “big cash crunch” between now and March 2021 as JobKeeper and JobSeeker are wound back and early super money and mortgage deferrals run out.
“So far, we look like going one better still on that degree of (GFC) outperformance this time.”
“But that will mostly mean avoiding the mistake too many nations made in the immediate aftermath of the GFC – they rested on their oars, generating a woulda-coulda-shoulda moment.”
At least part of the employment equation could be solved by massive infrastructure spending expected to be announced on budget night, while the government could also adopt a business investment allowance or delay or drop the SG increase to promote spending by businesses. And while Deloitte expects personal tax cuts to create some stimulatory effects for the economy, they won’t be as effective without increased government spending.
“Despite what you’ve read, the tax cuts are not unfair,” Mr Richardson said.
“But they are too big, though that mistake is already enshrined in legislation. And they aren’t as effective at creating jobs as some other programs. But if they are in addition to other stimulus measures, then you should welcome them with open arms.”
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