The federal budget update confirms Australia’s economy is rebounding strongly. Australians are now back working, spending and moving freely across the nation.
The updated numbers are encouraging and better than what was expected at budget 10 weeks ago.
Unemployment is lower, GDP growth higher, and the bottom line has improved.
But the road ahead is challenging. Our recovery is very much dependent on our continued success in containing COVID-19. While a number of nations are facing renewed virus outbreaks and new lockdowns, Australians are approaching Christmas with optimism and hope.
Consumer and business confidence are back at pre-COVID-19 levels. Eighty five per cent of the 1.3 million Australians who lost their jobs or had working hours reduced to zero at the start of the crisis are now back at work.
The September quarter had an increase in GDP of 3.3 per cent – the biggest quarterly rise since 1976. Australia’s economic recovery from the COVID-19 crisis is forecast to be faster than previous recessions.
The unemployment rate is expected to return to its pre-COVID-19 level in about four years – in contrast to the six years it took following the 1980s recession, and the 10 years it took following the 1990s recession.
In this update, real GDP is forecast to grow 4.5 per cent in 2021, following a reduction of 2.5 per cent in 2020. This is an upgrade to the budget forecast of 4.25 per cent growth in 2021, and a 3.75 per cent fall in 2020.
Australia is outperforming all of the major advanced economies. The euro area is forecast to contract 7.5 per cent; Japan 5.25 per cent, and the United States, 3.75 per cent this year.
With 734,000 jobs created in the last six months, the labour market has performed better than expected. Unemployment is forecast to peak at 7.5 per cent in the March quarter 2021, down from a peak of 8 per cent forecast at budget.
The unemployment rate steadily declines to 6.25 per cent by mid-2022, 5.75 per cent by mid-2023, and 5.25 per cent by 2024, when it approaches the level it was at the start of this year.
We have come a long way from Treasury’s initial estimate early on in the pandemic that the unemployment rate could hit 10 per cent by year-end or 15 per cent in the absence of JobKeeper.
This improved outlook follows an unprecedented level of economic support from the Morrison government. Of $251 billion of direct economic support committed, over $138 billion has flowed to households and businesses.
JobKeeper, the Coronavirus Supplement, the Cash Flow Boost, and three Economic Support Payments to pensioners and other eligible recipients have been an economic lifeline for millions of Australians.
The faster-than-expected rebound is flowing through to the budget bottom line. The underlying cash deficit is expected to be $197.7 billion, or 9.9 per cent of GDP in 2020-21, an improvement of $15.9 billion of expectations at budget. The total improvement across the forward estimates since budget is $23.9 billion.
Payments are expected to be $6.5 billion less in 2020-2021 than at budget, and receipts $9.4 billion better.
There is new expenditure on a number of initiatives including an additional 10,000 home care packages, the rollout of vaccines, and the temporary extension of the Coronavirus Supplement.
The improved economic outlook has led to an increase in expected company tax receipts and GST collections, and around 640,000 fewer people on JobKeeper so far in the December quarter than expected at budget.
The gross and net debt projections are broadly in line with those at budget, with gross debt stabilising at 53 per cent and net debt declining to 38.3 per cent over the medium term. Australia’s debt levels, even at their peak, remain less than half the average seen across advanced economies today.
Underpinning the mid-year economic and fiscal outlook (MYEFO) forecasts are our continued prudent commodity price assumptions with an iron ore price assumed to fall from high levels to $55 a tonne in the September quarter of next year – a quarter later than assumed at budget.
Assumptions around slower population growth, negative net overseas migration, and the timing of the opening of international borders are unchanged since budget. So too, the timetable for the national rollout of the vaccine, which is expected to be fully rolled out by late 2021. There do however remain downside risks to Australia’s economic recovery.
These include the timing, distribution and effectiveness of the vaccine in stopping the spread of the virus globally, trade tensions that limit Australia’s access to export markets and domestic economic uncertainty that could lead to higher household savings and lower consumption.
That all being said, the budget update provides further cause for optimism that Australia’s economic comeback is under way.
Josh Frydenberg is Australia’s Treasurer.