The bill is in for the unprecedented fiscal stimulus, and it’s a big one. The budget deficit will rise to $85.8 billion in 2019-20 and $184.5 billion in 2020-21 as the cost of programs like JobKeeper and JobSeeker bite the Morrison government’s bottom line. Treasurer Frydenberg – who was preparing to deliver a budget surplus this year, no matter how minute or meaningless that surplus actually was – is probably hoping that the damage is now done and that we can all get on with the business of recovery, Victoria notwithstanding.
“Our economy has taken a big hit, and there are many challenges we confront,” Treasurer Frydenberg told media. “We can see the mountain ahead and Australia begins the climb. We must remain strong. We must draw strength from our resilience as a nation and a people. And we will get through this, and we will get through this together.”
The economic update does assume that we are at the bottom of the trough. Real GDP is predicted to grow by 2.5 per cent in 2021 following a fall of 3.75 per cent through 2020. Household consumption is expected to lead the recovery, while the easing of health restrictions could deliver increased economic activity from the September quarter onwards. The most recent ABS payroll data suggests there has already been some level of turnaround in employment.
But all of these forecasts are based on assumptions that might be a little optimistic. And while there’s room for optimism, the last few months have shown that it’s best to avoid too much of it. Unemployment will rise to 9.25 per cent after Treasury suggested it might only hit 8 per cent, down from its initial forecast of 10 per cent. And while that’s still good news, it demonstrates that the situation can change rapidly – say, if COVID-19 were to jump the border from Victoria and wreak havoc on NSW just as it gets back on its feet. Or if China, incensed by Australia’s recent push to hold it more accountable for its actions, were to decide that it didn’t need our iron ore as much as the government insists it does.
Of course, these are ifs, not whens. And as RBA governor Philip Lowe pointed out this week, the government can – and should – take advantage of the lowest interest rates since Federation to borrow and spend big. Even if there were more obstacles on the path to recovery, they might not be insurmountable. But cases continue to mount in Victoria, while the world beyond our borders is undeniably less welcoming than it was before COVID-19. In times like these, optimism is a fool’s game.
