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Australia needs a bigger budget deficit for faster recovery from pandemic: Deloitte - Metro US

Australia needs a bigger budget deficit for faster recovery from pandemic: Deloitte

Pedestrians walk in front of a crane and scaffolding on a construction site in central Sydney

SYDNEY (Reuters) – Australia’s conservative government will need to embark on a more aggressive spending plan to power the country’s virus-stricken economy and boost employment when it unveils its budget next week, Deloitte Access Economics said on Monday.

Deloitte forecast a budget deficit of A$198.5 billion for the current financial year-ending June 2021, A$14 billion higher than the Treasury forecast in July, assuming no new fiscal policies are announced on Oct.6.

That would be the highest since records began post-World War Two. Other economists, including AMP, expect 2020/21 budget deficit to surpass A$200 billion, from an estimated A$85.3 billion last year.

“Australia’s defence against the virus has been world class so far. But challenges are mounting,” Deloitte Access Economics wrote in a note.

Families and businesses are set for a big cash crunch as emergency responses are tapered off by March 2021, money from early access to superannuation dries up, and as a range of mortgage and rent deferrals run out.

The government has already made a series of pre-budget announcements, including funding for domestic airlines and regional tourism.

Further spending, including on big infrastructure projects, and tax cuts, are expected to be announced in the budget.

Still, Australia’s unemployment rate is seen rising to near 10% from close to 7% now and stay elevated for a number of years.

Deloitte added the government will need to announce structural reforms as well as keep up its spending to aid a faster economic recovery.

“That combination gives us the best chance to get back to the Australia of February as fast as we can,” it added.

“And it underscores a key point: the need to let growth in the economy shrink the debt, rather than letting attempts to shrink the debt hold back the economy.”

Encouragingly, Treasurer Josh Frydenberg last week said the government would abandon its long-held aspiration to return the budget to surplus, saying clinging on to the past goal would no longer be prudent or appropriate.

The Reserve Bank of Australia (RBA) will hold its monthly policy meeting on Oct.6, hours before the budget. Analysts see a 50-50 chance a rate cut to 0.1%.

(Reporting by Swati Pandey; Editing by Simon Cameron-Moore)

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