Despite the budget deficit soaring to its highest level since WWII, UBS believes the government will need to spend even more as the impact of Victoria’s lockdown rolls through the economy and unemployment climbs to 9.25 per cent.
“The government’s comments suggest that there will be more stimulus coming through in the 6 October budget,” UBS economist George Tharenou said on a media call. “We think that will be part of a broader reform package, and we added $50 billion to our expectations for stimulus last week.”
Mr Tharenou believes the most likely form of stimulus will come in the form of another extension to JobKeeper and JobSeeker – costing between $10 billion and $13 billion, assuming payment rates are tapered again – as well as more support for businesses to encourage investment and bringing forward tax cuts for households to next year.
“You’re going to have an outlook for growth that is positive from the stimulus coming through the economy but also with some negatives from the Victoria shutdown,” Mr Tharenou said, adding that stronger than expected retail and trade data could mean the economy had contracted less than expected.
Mr Tharenou also expects the government will significantly increase its infrastructure spend, broaden items covered by GST, and more transition payments to state governments to encourage and fund a switch from “inefficient” stamp duty to land tax. However, September’s fiscal cliff still looms large over proceedings.
“Our estimate on the fiscal cliff has been reduced by the extension of some of these stimulus measures, but it still remains very large at $80 billion, or 16 per cent of quarterly GDP,” Mr Tharenou said.
UBS projects that growth will recover to 2.6 per cent in 2021 as domestic and international borders reopen. The RBA is expected to keep interest rates on hold, while there is “limited reason” to restart its quantitative easing program unless lockdowns persist for longer than expected.
