Date posted: 23/07/2020 5 min read

That’s a big hole, Josh

Josh Frydenberg’s economic update was a barrage of numbers but the 6 October Budget will have the useful details.

In Brief

  • Australia's budget deficit was A$85.8 billion in 2019-20 and will balloon to A$184.5 billion in 2020-21.
  • Australia's net debt is predicted to increase to A$677.1 billion (35.7% of GDP) at 30 June 2021.
  • The unemployment rate is forecast to peak at 9.25% in December.

A quick sum-up of Treasurer Josh Frydenberg’s 23 July economic update could be: Yes, it’s bad. But not as bad as the other bloke’s.

Frydenberg’s co-presenter, Australia’s finance minister Mathias Cormann, emphasised twice that: “Australia finds itself in a very challenging fiscal position. [But] we are in a better, stronger, more resilient position than just about any other country around the world.”

But it’s no economic picnic. As predicted, Treasurer Frydenberg listed some “eye-watering numbers”.

  • Unemployment is expected to peak at 9.25% in December (peak unemployment in the 1990s recession was 10.8%).
  • On a calendar-year basis, real GDP is predicted to grow by 2.5% in 2021, after a fall of 3.75% in 2020.
  • 2019-20 budget deficit is A$85.8 billion or 4.3% of GDP (before the pandemic, Frydenberg had predicted a A$5.5 billion surplus)
  • Predicted 2020-21 budget deficit is A$184.5 billion or 9.7% of GDP
  • Net debt is A$488.2 billion (24.6% of GDP) at 30 June 2020 and predicted to increase to A$677.1 billion (35.7% of GDP) at 30 June 2021.

Although Australia’s real GDP is expected to shrink by 1.25% across two years, Frydenberg pointed out that the US economy is expected to contract by 8%, the UK’s by 10% and France’s by 12%.

And while predicting a budget deficit of A$184.5 billion must be truly painful for a Liberal treasurer who so recently was so close to a budget surplus, that ache is lessened by historically low interest rates.

Borrowing has never been cheaper, and even with net debt predicted to top A$677 billion in this new financial year, Frydenberg estimated the interest bill on government debt at A$16.3 billion per year.

There’s no debt emergency

The view at CA ANZ is that now is not the time to panic about levels of public debt. Even with such “eye-watering” debt, “We need to work through the tears,” says CA ANZ Australian tax leader Michael Croker CA.

“Today was all about the numbers, with the treasurer revealing massive falls in tax revenue and record emergency spending to stimulate the economy, keep businesses afloat and help Australians remain employed.

“The emergency stimulus measures for businesses and individuals have been sensible, in the national interest, successful and very expensive.”

But Croker adds that the estimated A$85.7 billion spend on JobKeeper over 2020 and 2021 can’t mask growing concerns about the likely level of business failures in the lead-up to 28 March 2021, the new end date for the wage subsidy.

“Along with other accounting bodies, the Australian Small Business and Family Enterprise Ombudsman and COSBOA, we have been calling for the government to fund vouchers to give businesses access to crucial professional advice to help inform decisions about their doors staying open or closing altogether.”

Michael CrokerPicture: CA ANZ Australian tax leader Michael Croker CA.

No specifics on tax reform

It’s obvious that the government’s route to paying off debt lies with boosting the economy.

“The pathway to growing the economy is through lower taxes not higher taxes. The pathway to growing the economy is getting in place a skills program, infrastructure investment and tax reform,” said Frydenberg.

But he provided no specifics on that tax reform, or on any other programs to get the economy back on track.

“One day soon we will have to have a conversation about paying that debt back,” says Croker. “We need to start talking about structural reforms that will put us in better stead and reduce the burden on future generations of Australians.

“Australia’s entire tax, welfare and retirement landscape needs rethinking – this is a fact that is almost universally acknowledged and yet indecision has plagued us for decades.

“Nothing was said today about the prospect of tax reform measures in the 6 October 2020 budget, nor was there a progress report on the work of federal, state and territory treasurers tasked with working up options on tax and deregulation. Australians will want to know.”

The other important numbers

But there will be no economic recovery until there is a health recovery, and Frydenberg revealed some other important numbers during his update.

At the moment, Australia’s rate of 156 active COVID cases per million people compares with 3700 cases per million people in the UK, 7700 per million in the US and 7100 per million in Sweden.

“Our economy has taken a big hit,” said Frydenberg. “We can see the mountain ahead and Australia is beginning the climb. We can get through this together.”

“We can see the mountain ahead and Australia is beginning the climb.” –
Josh Frydenberg

However, those of us wanting more details on how exactly we will achieve this will have to wait until the 6 October Budget.

“The treasurer has opened our eyes to the fiscal problems Australia faces. It will soon be time to explain what needs to be done,” says Croker. 

Treasurer Josh FrydenbergPicture: Treasurer Josh Frydenberg. Image credit: Nic Walker.

Read more:

Treasurer’s Economic Statement 23 July 2020

See more reporting and CA ANZ analysis of Treasurer Josh Frydenberg’s economic update.

Read more on the economic update

Budget website

The Economic and Fiscal Update is available on the Budget website.

Find out more

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